Saving vs. Investing: How to Make the Most of Your Money

Key Takeaways

• A hybrid saving and investment strategy may help you achieve financial wellness.
• Consider building your savings account before starting to invest, 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.

Is It Better to Invest vs. Save?

Factors to Consider When Deciding to Save or Invest

• Age: If investment markets take a downturn, it could take many years to recover your money. If you’re younger, you typically have the time to wait it out (and hopefully experience an upswing on the other side). If you’re older, savings accounts may feel safer and potentially more beneficial since they generally aren’t subject to market volatility.
• Risk tolerance: Savings products are lower risk because, even if rates drop, the existing balance (including initial deposit and interest earned) isn’t in jeopardy. Investing is considered risky because the asset’s value could drop below the amount of initial investment if the market declines.
• Protection: FDIC insurance protects savings accounts held at FDIC member institutions by up to $250,000 per depositor, account type, and institution. Investments typically lack such insurance.¹
• Liquidity: Turning investments into cash may take time and could result in a loss depending on market timing. The money you keep in your savings accounts is more easily accessible for short-term needs.
• Rate of return: Your returns on savings vary depending on the saving product you choose. Financial institutions tend to raise and lower their savings account rates based on the federal funds rates. That said, high-yield savings accounts usually offer rates much higher than those of traditional savings accounts. In comparison, the stock market tends to see average returns of around 10% per year.² But in any given year, the returns of the market could fluctuate dramatically.

Ways to Save

• Traditional and High-Yield Savings accounts: Available at most banks, the traditional savings account is like an old friend… it’s been around forever. These savings accounts earn interest on the money you keep in them, and rates vary from bank to bank. A more modern twist is the high-yield savings account (HYSA) that is typically found at digital banks with same interest-earning benefits and offers rates much higher than the national average.
• Money market deposit accounts: Money market deposit accounts (MMDA) are savings accounts where your money is invested in specific funds.³ You receive returns at rates higher than most traditional savings accounts, but some MMDAs have fees that could impact your earnings.
• 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.

• 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.
• 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 savings bonds that earn 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.⁵

Ways to Invest

• Retirement accounts: Opening a 401(k) with your employer or 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 could help 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.
• Brokerage accounts: Brokerage accounts let you invest in different funds, stocks, bonds, and other businesses to grow 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?

• 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 the money you keep in investment accounts.
• Plan for retirement: Experts recommend saving at least 15% of your annual salary 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 that tend to adjust each year as defined by the government.
• Invest based on goals and risk tolerance: There is no hard and fast rule about how much you should invest each year. However, visiting your budget and ensuring your recurring expenses are fully covered before you start investing may be useful. 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?

The Pros and Cons of Saving Accounts and Investing Accounts

Final Thoughts