Should You Invest or Save? How to Make the Most of Your Money
Saving and investing may help you reach your financial goals faster.
Saving and investing may help grow your wealth over time. While both paths may help your money grow, they have distinct differences when it comes to returns and risks.
Many people choose to pursue both strategies, but how much you put in each bucket depends on your unique financial situation. Before you decide, let’s dive into the saving and investing discussion and look at how each method could help boost your wealth.
As always, it’s important to consult with a financial advisor on any investment matters.
Employing a hybrid strategy of saving and investing may help you achieve financial wellness.
You may want to build your savings before you start investing, as investments often take time to see results and tend to be less liquid than savings.
Investing comes with increased risk but often offers higher returns than traditional saving methods.
Saving vs. Investing: Which Is Better?
Both saving and investing may help you grow your wealth in the long run, but one method may be better depending on your goals, timeframe, and current cash situation.
Typically, you want to build your savings until you have enough money to cover unexpected emergencies or handle large purchases before investing. Once you’re comfortable with your current savings reserves, you may shift some of your money towards investments.
Investments may help you prepare for retirement, generate additional income, and build your wealth. But doing so takes time and often reduces the liquidity of these funds, which makes having savings in place before you start investing a good idea.¹
Moderate to High (depending on investment)
Low to Moderate
Moderate to High
Medium to High (depending on investment)
Low to Moderate
Withdrawals may be subject to taxes and fees
Better for short and medium-term goals
Better for long-term goals
Factors to Consider When Deciding to Save or Invest
Ultimately, the decision between building savings and investing depends on your financial situation. There are a few factors that may make one method better than the other.
Age: The younger you are, the more time you have for your investments to recover from economic downturns and for them to increase in value. If you’re older, adding to your savings may be more beneficial since there is less volatility.
Risk tolerance: Savings products offer lower risks since the value of your account usually can’t decrease even if rates drop.² Investing may have higher risks since performance is tied to market conditions and your account’s value may drop below what you initially invested.
Protection: Savings accounts held at FDIC member institutions are protected by FDIC insurance
up to $250,000 per depositor, per account type, per institution. Investments typically lack such insurance.³
Liquidity: Turning investments into cash may take time and could result in a loss if you have to sell them when their value is lower than when you purchased. It’s often best to use investments for long-term goals and sell them when they’re worth more than you paid to buy them. The money you keep in your savings accounts is more accessible.
Rate of return: Depending on the saving product you choose, your returns will vary. For example, in October 2023, traditional savings accounts had an average rate of 0.42% APY, whereas some high-yield savings accounts offered rates around 5.00% APY.⁴ The stock market tends to see average returns of around 10% per year.⁵
Ways to Save
There’s more than one way to save money and each method offers unique benefits. Let’s take a quick look at some of the common saving account types out there.
Savings accounts: Available at most banks, savings accounts earn interest on the money you keep in them. Rates vary from bank to bank, but you may find high-yield savings accounts offering rates near 5.00% APY.⁶
Money market deposit accounts: Money market deposit accounts (MMDA) are savings accounts where your money is invested in specific funds. You receive returns at rates higher than most traditional savings accounts, but those rates are impacted by the market.⁷ Additionally, an MMDA could indirectly lose value if its rate falls below the cost of fees to keep the account open.⁸
Certificate of deposit (CD) accounts: Certificates of deposit are a type of savings product that requires you to leave money in the account for a specific period of time, called a term. In exchange for a higher rate, most CDs don’t allow you to make withdrawals before the term ends, unless you pay a penalty.
While the next few methods are technically investments, they’re considered very low risk since they’re backed by the U.S. government and have more consistent rates than other types of investments.
Treasury bills: Treasury bills are a type of investment issued by the Department of the Treasury. Typically, the bills mature after a year and may offer higher returns than traditional savings accounts.⁹
I Bonds: Like treasury bills, I bonds are issued by the Treasury Department and offer a compound rate that may help protect your money against inflation.
EE bonds: EE bonds are a type of savings bond that earns interest until the bond reaches maturity at which point they’re worth double what you paid for them. These are typically considered best for long-term savings goals.¹⁰
Ways to Invest
For certain long-term goals, investing often makes more sense because your account has time to recover from market downturns. Here are a few of the most common investment accounts.
Retirement accounts: Opening a 401(k) with your employer, an IRA on your own, or both, helps you set money aside for retirement. The money in these accounts is invested in different funds to help you earn higher returns. However, since these accounts are subject to market changes, you may see losses from time to time.
Education accounts: If you have children, starting an education fund like a 529 plan helps you build savings for their future. Funds in a 529 are for qualified education expenses like books, room and board, tuition, and more. And if your child doesn’t go to college, you’re able to roll some of the money into a Roth IRA which may give them a head start on saving for retirement.¹¹
Brokerage accounts: Brokerage accounts let you invest in different funds, stocks, bonds, and other businesses to grow your wealth. These accounts also have fewer restrictions on how and when the funds may be used than investment accounts like a 401(k) or 529. 401(k)s and 529s often charge penalties if you don’t use the funds for their intended purpose or withdraw them before a certain time. Brokerage accounts tend to carry the most risk but often offer higher rates of return.
How Much Should You Save vs. Invest?
The exact amount you should save or invest depends on your situation, but there are a few general rules of thumb you may want to follow.
Start By Building Your Savings: Before you invest, you may want to build an emergency fund to help protect yourself from any unexpected expenses. Remember, savings are more accessible than money you keep in investment accounts.
Plan for Retirement: Experts recommend saving at least 15% of your salary each year for retirement. If your employer offers a 401(k), enroll in it as soon as you’re able to and take advantage of employer-match contributions. Don’t forget about contribution limits for your retirement accounts. As of 2023, you’re allowed to contribute a maximum of $22,500 per year to 401(k) accounts¹² and $6,500 for traditional and Roth IRAs.¹³
Invest Based on Goals and Risk Tolerance: There is no hard and fast rule about how much you should invest each year, but it may be useful to visit your budget and make sure your recurring expenses are covered in full before you start investing. Also consider your risk tolerance and only invest as much as you’re comfortable with. It’s also useful to consider why you’re investing – are you preparing for a large purchase in a few years or trying to increase your income through investments?
As always, it’s best to speak with a financial advisor about your investment strategy, as they may help you choose the right portfolio for your goals and preferences.
Building your savings and investing your money are both equally important to your long-term financial well-being. While you may choose to focus on one or the other, you don’t have to. Most people tend to benefit from building their savings and investing at the same time. Doing so may help you achieve true financial wellness.