At first glance, saving and investing seem like similar concepts. After all, they both involve putting money aside to — hopefully — let it grow.

However, there are some big differences when it comes to saving vs. investing. In this article, we'll cover the differences, as well as some special considerations that may help you decide when to save or invest.

Saving vs. Investing: What's the Difference?

Typically, when you save money, you put it in an interest-bearing bank account such as a traditional savings account, money market account, or certificate of deposit (CD). These accounts pay interest, meaning your money will automatically grow over time. Banks typically advertise their interest rates in terms of APY (annual percentage yield), which takes compounding into account.

Many savings accounts you can open at your bank are insured by the Federal Deposit Insurance Corporation (FDIC), meaning that your deposits are insured by the U.S. government up to the maximum limits[1]. Likewise, accounts offered by credit unions are typically insured by the National Credit Union Administration (NCUA) up to the maximum limits[2].

On the other hand, investing your money usually involves depositing it into a brokerage account and using it to buy assets that may grow in value over time. 

When you invest, your assets may have greater potential for growth than saving. After all, from 2013 to 2023, the S&P 500 — a stock market index tracking the 500 largest publicly listed companies — returned an average of more than 13% per year[3]. By comparison, the average interest rate on savings accounts is 0.47 percent[4].

However, there's a trade-off. When investing, you put your money at risk. There's a very real chance that you could lose some, or even all, of your principal (the money you originally invested).

Key Considerations in Choosing Between Saving and Investing

To help decide when it's better to save or invest, ask yourself the following questions:

Do You Have an Emergency Savings Fund?

Before thinking about investing in a brokerage account, you may want to consider having an emergency savings fund in place.

An emergency savings fund is a savings account you can draw from when confronted with an unexpected expense such as a car repair, a new major appliance, a medical bill, etc. It can also come in handy in the unfortunate event that you lose your employment or other major income source.

Having an emergency fund can prevent you from taking out a costly personal loan or racking up credit card debt. Although the amount of money you put in an emergency fund may vary depending on your situation, a common rule of thumb is to save up at least three months' worth of living expenses. This should include your mortgage or rent, utility bills, transportation costs, groceries, etc. 

Once you have a sufficient emergency fund, that’s the time to consider opening an investment account.

Do You Have Short-Term or Long-Term Financial Goals?

Due to its inherent risks, investing is generally a better choice if you want to invest for the long term. That's because, in the case of a stock market downturn, you typically have time to recoup and regrow your assets. This is one reason why investing in a retirement account such as an IRA or an employer-sponsored 401(k) plan is such a popular option for people who want to grow their retirement assets.

On the flip side, if you're planning for a big expense or purchase within the next five years or so — such as a car, major vacation, or home down payment — saving your money in a bank account may prove a smarter option. 

A Closer Look at Savings and Investment Vehicles

These days, there are many options to choose from when it comes to saving and investing. Here's a rundown of some popular products on the market.

Types of Savings Accounts

  • Traditional savings accounts: Basic savings accounts are offered by banks and credit unions. Typically, you'll earn a modest amount of interest on deposited funds. There may be a minimum deposit required to open and maintain a savings account. These accounts are covered by FDIC insurance (when offered by banks) or NCUA insurance (when offered by credit unions).
  • High-yield savings accounts: High-yield savings accounts typically pay higher interest rates than traditional savings accounts. They may also have stricter minimum requirements for deposits and/or balances. Otherwise, they function just like traditional savings accounts and offer FDIC or NCUA insurance. 
  • Money market accounts: Like high-yield savings accounts, money market accounts generally offer higher interest rates than traditional savings accounts. Conversely, they often come with stricter requirements than other savings account types regarding minimum deposits and balances. 
  • Certificates of deposit: Certificates of deposit usually offer generous interest payouts. However, most CDs require you to leave your money deposited for a predetermined time. If you make an early withdrawal, you may forfeit your interest earnings. Some banks may even penalize early withdrawals by charging penalties that eat into your initial deposit.  

Types of Investment Accounts

  • Taxable brokerage accounts: These standard brokerage accounts allow you to invest in various investment products, such as stocks, bonds, futures, mutual funds, exchange-traded funds (ETFs), etc. You can choose whether to actively pick and choose your own investment vehicles or let a financial advisor do it for you. You may have to pay maintenance or trading fees, depending on the broker-dealer. These accounts are very liquid, meaning you can withdraw money anytime. However, you must pay taxes for any profits made from those investments.
  • Individual retirement accounts: Individual retirement accounts (IRAs) also allow you to invest in a wide range of asset classes. However, these accounts are intended to help you invest for retirement and has tax benefits. With a traditional IRA, the money you contribute to the account may be tax deductible. With a Roth IRA, your contributions aren't deductible, but you can withdraw distributions tax-free once you've reached a specified age (currently, 59-½)[5].
  • 401(k) plans: Like IRAs, employer-sponsored 401(k) plans are tax-advantaged retirement savings plans. However, these are typically offered by your employer, and your contributions come straight out of each paycheck. Your employer may match part or even all of your regular 401(k) plan contributions. 

Saving vs. Investing: Set Yourself up for Success

Whether you've decided to open a savings account to meet short-term money goals or want to try investing in securities, choosing a suitable account is important for success.

What to Look for in a Savings Account

  • FDIC or NCUA insurance: While many bank deposit accounts are covered by FDIC or NCUA insurance, not all are — especially accounts at new online-only banks. It's worth checking to make sure.
  • Annual percentage yield (APY): To maximize your savings, look for a savings account that offers a high APY. This indicates how much actual interest you can earn, taking compounding into account. The higher the APY, the higher the return on your deposit. However, consider if the APY offered is a promotional rate only, one that will drop after a certain period of time.
  • Fees: If your savings account offers a generous interest payout, make sure you won't lose the money you earn to monthly fees. Some banks may not charge fees at all, while others may waive fees if you maintain a large enough balance or meet some other requirement.
  • Mobile banking: It's a plus if the bank offers a mobile app that allows you to keep tabs on your accounts, as well as make easy and convenient deposits and transfers.

What to Look for in an Investment Account

  • Hands-on vs. hands-off: Do you want to actively manage your investment account, picking securities to buy and sell? Or do you want to "set it and forget it" and let the brokerage firm do the work? If you'd rather be more hands-on with your portfolio, explore brokerage firms that offer investment advisory programs and brokerage services.
  • Account types: Are you investing for eventual retirement, or do you want extra income now? Your needs will help to determine if it’s more advantageous to open a traditional taxable brokerage account or use a tax-advantaged retirement account such as an IRA.
  • Fees: Consider all the costs of each brokerage account, including maintenance fees, commissions, account minimums, etc. 

Saving vs. Investing - A Balanced Approach for Your Financial Journey

Ultimately, choosing whether to save or invest comes down to your financial goals. If you aim to save money for an expense in the short term, savings accounts offer a relatively safe way to protect and grow your money. However, if you want financial growth over the long term, an investment account may be a better fit — although investing comes with risks.

Of course, it's always possible to both save and invest at the same time. In fact, by allocating money to both types of accounts every month, you have the potential to grow funds for a big purchase while letting your retirement assets grow.