Saving and investing are two financial strategies that can help you secure your financial future, but many people aren’t clear on exactly how they differ. No matter what your financial goals are, understanding the differences between savings accounts and investment accounts is key. Let’s take a closer look at each option so you can better determine how they should fit into your overall financial strategy.
Saving Accounts
Saving money through traditional bank products like savings accounts, CDs, and money markets can be beneficial in several ways. They can provide:
Investing is ideal for long-term objectives like saving for retirement, funding a child’s education, or building generational wealth. Investing through a 401(k), IRA, or brokerage account may be a good way to achieve your long-term financial goals and can allow you to outpace inflation over time. Benefits of investing can include:
Saving Accounts
Saving money through traditional bank products like savings accounts, CDs, and money markets can be beneficial in several ways. They can provide:
- Liquidity and Accessibility: Savings accounts and money markets provide quick access to your funds, which is ideal when you need cash fast. While CDs are less liquid (typically offering higher fixed interest rates in exchange for keeping your money in the account for a set period of time), there are short-term CDs available that allow you to earn a competitive rate with full access to your funds once the term is over. A CD ladder can also be used to ensure regular access to funds. Savings accounts, money markets, and CDs can be a good way to save up emergency funds, or other short-term goals like a down payment, car, or vacation.
- Safety and Stability: One of the greatest advantages of traditional bank accounts is security. As long as you're banking with an FDIC-insured institution, your deposits are protected up to $250,000 per depositor. Some banks, like BankFive, even offer deposit protection above FDIC limits, ensuring your money is safe no matter what your balance is.
- Predictable Returns: With a CD, you can lock in a fixed interest rate for the entire CD term. This means you can calculate your return on investment ahead of time. While savings and money market accounts typically have variable interest rates that the bank can change, you can still shop around for competitive offers and move your money if rates fall below your comfort level.
Investing is ideal for long-term objectives like saving for retirement, funding a child’s education, or building generational wealth. Investing through a 401(k), IRA, or brokerage account may be a good way to achieve your long-term financial goals and can allow you to outpace inflation over time. Benefits of investing can include:
- Tax Advantages for Certain Accounts: Retirement accounts such as 401(k)s and IRAs, and educational investment accounts like 529 plans and Coverdell Education Savings Accounts, allow for tax-deferred growth. Roth IRAs, 529 plans, and Coverdell accounts also allow for tax-free qualified withdrawals.
- Potential for Higher Returns: Whether you choose to invest through a retirement account, education savings account, brokerage account, or a mix of all three, your account will typically include various types of investments such as stocks, bonds, mutual funds, and EFTs. Each type of investment carries its own level of risk and potential return. While investment returns are not guaranteed, and your account may face periods of market volatility, investment accounts have the potential to grow significantly over time. Because of the risk involved with investments, it’s crucial to assess your own personal risk tolerance level. While some investors prefer to “go it alone”, it’s generally considered wise to consult with a qualified tax professional or financial advisor to ensure your investment strategy aligns with your current financial situation, goals, and comfort level.