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

Saving and investing may help you reach your financial goals faster.

Both saving and investing could help grow your wealth over time, but each have distinct differences when it comes to returns and risks.

Many people pursue both strategies, but how much money you direct toward each depends on your unique financial situation. Before you decide, let’s dive into the discussion of savings and investing, and how each method could help boost your wealth.

As a reminder, it’s important to consult with a financial advisor on any investment matter.

Key Takeaways

• A hybrid saving and investment strategy may help you achieve financial wellness.

• Consider building your savings before 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.

Is It Better to Invest vs. Save?

Both saving and investing may help you grow your wealth in the long run. However, 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 savings level, you may shift some of your money toward investments.

Investments may help you prepare for retirement, generate additional income, and build wealth. But doing so takes time and often reduces the liquidity of these funds, which means it’s wise to have some liquid savings set aside before you start investing.¹

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: If investment markets take a downturn, it could take many years for you 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 there isn’t the market volatility.

• Risk tolerance: Savings products are lower risk since the value of a savings account balance doesn’t decrease when the rate drops.² Investing could be higher risk since performance is tied to market conditions; your asset’s value could drop below what you initially invested 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.³

• 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 vary depending on the saving product you choose. For example, in October 2024, traditional savings accounts had an average rate of 0.46% APY, whereas some high-yield savings accounts offered rates up to 4.30% 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 available.

• 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 near 4.30% APY or higher.⁶

• Money market deposit accounts: Money market deposit accounts (MMDA) are savings accounts where your money is invested in specific funds.⁷ 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.

While the next few methods are technically investments, they’re considered a lower risk investment since the U.S. government backs them and have more consistent rates than other types of investments.⁸

• 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 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.¹⁰

Ways to Invest

Investments come in many shapes and sizes. Here are a few of the most common investment account types.

• 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.¹¹

• 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?

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 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. In 2025, you’re allowed to contribute a maximum of $23,500 per year to 401(k) accounts and $7,000 for traditional and Roth IRAs.¹²

• 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?

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.

The Pros and Cons of Saving and Investing

Building your wealth could help you reach your financial goals easier, but before choosing the best method for your situation, it’s helpful to understand the benefits and downsides of both saving and investing.¹³

Final Thoughts

For many people, building savings and investing in the markets are equally important for their financial wellness. Everyone can choose what works best for them: their risk tolerance, their interests, their age, and so much more. Overall, the key is to have a money plan and set funds aside, in the short and long term, to help you achieve your goals and live a long, rich life.