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Everyone should have an emergency savings fund for protection during hard times. But what about investing? Where do you start? And how do you know how much money to contribute to saving versus investing?

Is One Better Than the Other?

Saving and investing are equally important to sound financial planning. Neither is considered “better” than the other except when applied toward a specific goal. And even then, it’s more accurate to say one is more suitable to specific objectives.

For example, if your goal is financial security in retirement or creating a cushion for unexpected expenses or job loss, saving is more likely to help you achieve that goal.

If, on the other hand, you have built an adequate emergency fund and are motivated to grow your wealth, then investing is the more appropriate use of your money. However, stock market volatility will always pose a risk to this potential reward so you should be willing to accept the risk that you could lose your money.

Striking a Balance Between Investing and Saving

Ultimately, you should have a financial plan that includes both savings vehicles, such as CDs, 401(k) plans or IRAs, high-yield savings accounts and fixed annuities, and a balanced, strategic investment portfolio.

Many experts advise building a solid savings for emergencies and retirement before investing in riskier stocks. The reason for this is simple: the fluctuation of the stock market could mean that investors lose money. If you have nothing in savings and the stock market does poorly, you have no financial resources should an emergency arise.

A chart comparing saving and investing
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Would-be savers and investors may also be deterred by the complexity of some of the financial instruments they have to choose from. Indeed, many of these products have characteristics of both, making it hard to know which products qualify as savings tools and which constitute investments.

Variable annuities, for example, are sold by insurance companies along with other types of annuities designed specifically for retirement saving. But they are classified as securities and regulated by the Securities and Exchange Commission.

Saving

We’ve all heard the money-saving mantras:
A penny saved is a penny earned.
Pay yourself first.
A fool and his money are soon parted.

But according to the Federal Reserve, 40 percent of Americans would have to use a credit card or borrow money from family or friends to cover an unexpected $400 expense, and 12 percent would have no way to cover the expense.

And the Fed’s Report on the Economic Well-Being of U.S. Households in 2019 revealed that almost 40 percent of “non-retired adults were struggling to save for retirement in 2019 and felt that they were not on track with their savings.”

In fact, many Americans believe they don’t have enough money to contribute even a small amount to savings.

These misguided beliefs are the result of low levels of financial literacy and underdeveloped budgeting skills.

Pros and Cons of Saving Without Investing

A list of pros and cons of saving only makes sense in the context of saving money to the exclusion of investing. In fact, the benefits of saving money far outweigh the scant disadvantages.

Not all savings methods are created equal. Different savings vehicles offer specific benefits such as tax-deferral, higher returns and greater flexibility and liquidity.

Pros
  • Low/no risk
  • Clearly defined interest rates
  • Accessible
  • Tax favored (annuities, 401(k) plans, IRAs)
Cons
  • Low returns
  • Susceptible to inflation
  • Accessible

Note that accessibility is included on both lists. Liquidity can be a detriment or an advantage depending on your self-control. If you know you’re inclined to irresponsible spending, you might want to take that into consideration when you’re selecting a savings vehicle.

It makes sense to have more than one type of savings, too. You might want an emergency fund in a high-yield savings account that you can access easily in a crisis and a CD with a future maturity date for a child’s college fund.

How Much Money Should You Keep in Savings?

Financial advisors suggest having at least six months of living expenses in an emergency fund. They also encourage people to begin saving for retirement as early as possible, contributing the maximum amount allowable to their 401(k) or other qualified retirement plan, especially if your employer matches your contribution.

Savings Tools

Building your savings requires the right tools, and you have more options at your disposal than you may even know.

Types of Savings Vehicles
  • Savings accounts
  • Money market accounts
  • CDs
  • Qualified retirement plans
  • Health savings accounts (HSAs)
  • Flexible spending accounts
  • Fixed annuities

Investing

If you’re hoping for capital appreciation and feel comfortable with more financial risk, you have a variety of investment products at your disposal — from stocks and bonds to mutual funds and exchange-traded funds (ETFs).

Your investment portfolio will include a mix of investments with the potential to provide a return on your principal while mitigating the effects of a down market. Your portfolio may not resemble your neighbor’s because each of you will, with the assistance of your financial advisors, build a portfolio based on your unique goals, available capital, investment time horizon and risk tolerance.

Pros and Cons of Investing

The primary advantage of investing is the opportunity to grow your principal. Unfortunately, this opportunity always comes with the risk of loss. And, unlike deposit savings accounts, most investment vehicles require that you have at least a rudimentary understanding of key investment concepts.

FINRA suggests that all investors understand the following concepts:

Even if you have a trusted fund manager or stock broker, you should understand these investing basics. It’s your money; you need to know where it’s going and what it’s doing.

How Much Money Should You Invest?

Once you have an emergency fund in place, you should invest enough money to reach your growth goals. These will look different for everyone, but most people will share the common objective of keeping up with, or beating, inflation.

The average inflation rate is roughly 3 percent per year. This means that the money in your savings account will lose value over time. To preserve your money’s purchasing power, you’ll need an investment strategy that strikes a balance between moderate growth and risk management.

To grow your wealth, on the other hand, you’ll need to assess your risk tolerance. You’ll be exposed to more risk than you may be comfortable with. Having a knowledgeable financial advisor at your side can allow you to invest with more confidence, especially if you’re new to investing. A professional with risk management experience will work with you to build a diverse portfolio that can weather the ups and downs of the stock market.

Investing Tools

For those who have the skill, desire and knowledge to manage their own investments, online investment platforms and investment apps, such as invstr and Robinhood, make it possible to analyze the markets, evaluate your investments’ performance and trade stocks without a traditional broker.

Automated investing platforms, called robo advisors, use algorithms to allocate assets. Robo advisors are less expensive than traditional advisors and provide less experienced beginning investors with a place to start in the world of investing. As with all investing tools — and investments themselves — each robo advisor service has its own fee structure, level of support and minimum-deposit requirements. Do your research before choosing a robo advisor or other do-it-yourself (DIY) investment tool.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: September 18, 2020

6 Cited Research Articles

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  1. Board of Governors of the Federal Reserve System. (2020, May 21). Dealing with Unexpected Expenses. Retrieved from https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-dealing-with-unexpected-expenses.htm
  2. Board of Governors of the Federal Reserve System. (2020, May 21). Retirement. Retrieved from https://www.federalreserve.gov/publications/2019-economic-well-being-of-us-households-in-2018-retirement.htm
  3. FINRA. (n.d.). Bonds. Retrieved from https://www.finra.org/investors/learn-to-invest/types-investments/bonds
  4. FINRA. (n.d.). Key Investing Concepts. Retrieved from https://www.finra.org/investors/learn-to-invest/key-investing-concepts
  5. FINRA. (n.d.). The Reality of Investment Risk. Retrieved from https://www.finra.org/investors/learn-to-invest/key-investing-concepts/reality-investment-risk
  6. FINRA. (n.d.). Types of Investments. Retrieved from https://www.finra.org/investors/learn-to-invest/types-investments