Saving and investing are both ways to set money aside for your future. Both involve growing your money. And both should involve goals that make sense for your personal situation. But there are a few key differences to keep in mind that can change whether you will meet your goals by saving or by investing.
On this page you’ll find
What are the pros and cons of saving?
Saving is about putting money aside for your future. That means the money is kept in a different place than the money you use for day-to-day spending.
Saving often has a specific short-term goal attached to it. The goal could be saving up enough to buy something small like a new phone or concert tickets. Or it could be building an emergency fund to help you through an uncertain time in the future. When you have savings, you won’t need to add to your debt in order to cover expenses.
Your savings goal will tell you how much you need to save. For example, if you want to have an emergency fund that can cover at least three months of living expenses, you can calculate that based on your current monthly spending.
How you save is up to you. You can set aside money for savings each month or each week, depending on your cash flow. Try to make it automatic by setting up direct transfers from one bank account to another. It’s typical for savings to be put somewhere you can access quickly when you need it, but still in a secure account — for example, a savings account or a TFSA.
Money kept in savings can be both secure and accessible when you need it. However, one of the downsides of saving is that the interest rates on savings accounts can be lower than the rate of inflation. This means your money could have less purchasing power in the long run.
Saving also tends to generate lower interest than most investment portfolios. So, while saving is ideal for short-term financial goals and emergency needs, it’s not the ideal way to put aside money for the long term.
Sometimes you can find more money to save by renegotiating what you pay for a monthly bill. Consider trying these five money saving tips.
What are the pros and cons of investing?
Compared to saving, investing has the potential for higher returns but also more risk. Investing involves buying assets or securities which hopefully produce a return. You can make money from investing if your investment earns interest, dividends, or produces a capital gain.
In the long term, investing has historically provided higher returns than savings accounts. Investments in the stock market have also historically provided returns higher than the rate of inflation over longer time periods. This makes investing ideal for long-term goals such as retirement, a home purchase or future income. If you’ve already established a savings habit and are comfortable putting aside money for future goals, investing may be right for you.
The potential for higher returns means that investing can help you accumulate wealth faster than saving. However, investing also involves more risk. The value of your investments can fluctuate up and down, especially in the short term depending on many factors, including:
- The type of investment.
- The performance of companies or a specific industry.
- The economy as a whole.
Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will receive a higher return by accepting more risk and you may lose some or all your money. Knowing your risk tolerance level is important because there is no guarantee of return.
Some accounts such as the Tax-Free Savings Account (TFSA), Registered Education Savings Plan (RESP), and Registered Disability Savings Plan (RDSP) can hold savings and investments. Speak to your financial advisor about the strategy that’s right for you.
How do you know whether to save or invest?
Investing versus saving does not have to be an either-or scenario. You can work towards both saving and investing goals at the same time. Some financial goals will be a better fit for saving and others for investing.
It’s important to know how much you have available to save and invest each month, and how much time you have to meet your goals. Looking at your monthly budget and the timing of your goals can give you a clearer picture.
Even if you only have a small amount to save each month, it’s still a good idea to get into the habit. Small amounts add up over time. And once you’re in the habit of saving, you can gradually increase the amount as your budget allows for it. Learn more about ways to save more.
You should also consider whether you have any high interest debt that still needs to be paid off. In this case, it may be a good idea to pay down this debt before focussing on investing, because the debt is likely to accumulate faster than any investing returns. Learn more about paying down debt or investing.
If you’re very risk averse, then you may be more comfortable with saving compared to investing. But there are many ways to invest with varying levels of risk. Investing, and potentially earning a return higher than the rate of inflation, may be a good way to meet your long-term goals. Learn more about how to get started, including what types of accounts are available, and tax implications. You can also think about what type of investments are right for you and your goals.
If you are paying off high interest debts such as credit cards, it may be better to pay these down first before focusing on large savings goals or investing. The interest accumulated on these debts will grow faster than the interest on your savings.
Summary
Saving and investing are both ways you can grow your money for the future. There are a few important differences to keep in mind:
- Saving is ideal for short-term goals that you want to reach in the next couple of years.
- It’s a good idea to keep saving in an account that’s secure but accessible when you need it, such as a savings account at the bank.
- Investing may provide a higher rate of return, and help you reach your long-term goals.
- Investing also comes with higher risk than saving, so it’s important to consider your risk tolerance when choosing investments.
- You can save and invest at the same time.
