in

Why Investing is Better Than Saving Money

YAYImages ID: 24690200 BY: Olivier-Le-Moal

Chances are you have been told all of your life that you should save money, but what does that really mean? Does that mean you should throw your money in a savings account and then forget about it? Or should you do something more so your money can grow? If you’re unsure, then read on to find out why investing is better than saving.

why investing is better than saving money - text pin for pinterest

Learn Why Investing is Better Than Saving

There are a number of reasons why investing your hard-earned money is a better idea than simply saving it. 

But before we get into them, it’s best to understand the differences between saving money and investing it.

What is a Savings Account?

A savings account allows you to withdraw funds from an account at any time with no penalty, it is best to only keep enough money in your savings so that if something happens and you need it, it will be available. 

Saving vs Investing

Investing is better than saving money because it pays you back dividends from the company that you are invested in.

On average, stocks will return about 6% in dividends per year. 

That can be lower or higher depending on how you invest your money, but while the stock market will have highs and lows, over time, they even out to a good rate of return.

When saving, your money is not being invested and so making a return on your investment is out of the question.

Savings accounts typically pay less than one percent in interest per year.

That means your money will be worth less over time instead of more. This is due to inflation and the fact you aren’t making enough interest on your money to overcome the loss.

two-surprised-women-wearing-similar-jump-suits-looking-at-each-other-over-gray-background
YAYImages ID: 10142780 BY: moodboard

How Are Saving and Investing Similar?

Saving and investing are similar in the sense that you can use accumulated money for something more important down the line such as buying a home or saving for retirement.

Whether you are saving or investing, you are setting aside money for future use which is always a good thing.

Both savings and investments earn you a return on your investment when done correctly.

A savings account can be considered an investment when it has a higher interest rate than a regular checking account, but there isn’t as much risk involved with this type of investment since you can withdraw your funds at any time without interrupting the flow of returns.

take surveys and get paid

When Should People Be Saving VS Investing?

If you have a lot of debt or don’t have an emergency fund, then you should be saving your money to build up that fund.

Once you have an emergency fund, then you should consider paying off your debts next.

Yes, you can be paying off your debts and investing at the same time, but it only makes sense to do this if you are receiving a higher return on your investments than what you are paying in interest rates on your debts.

Once your debts are paid off and you have money set aside in an emergency fund, then it is time to start investing.

How to Know if You Should Put Your Money in a Savings Account or if You Should Invest It

If you have a small amount of money to invest, it is best to start off in a savings account until you have more money saved.

Once you have a decent amount of money set aside to invest, go ahead and start looking for investment opportunities. This could be starting a 401K or actually buying stocks and bonds through a broker.

The Pros of Saving Money in a Bank

Saving money is beneficial because you have money for emergencies, travel, and weddings.

You can also save up enough money to make an investment once you are ready.

There are many pros to saving money.

For example, saving money makes it easier for you to reach your goals.

If you want to buy a house in five years, it would be smart to save the money so that you have the cash when you finally buy (or at least make a large down payment).

The other good thing about savings is that it provides relief from stressful situations.

Cons of Saving Money in the Bank

If you have a large amount of money in the bank you are losing money as you will not receive a good interest rate.

 Also, if the bank does charge fees for withdrawals and/or checking your account balance, then this could potentially cost you quite a bit of money each month.

Federal regulations state that you can only make six withdrawals from a savings account each month. 

The main risk of putting your money into a savings account is that you will lose it due to inflation.

Inflation is the rise in the price of goods and services over time.

This means that if you keep your money in a savings account for many years, the purchasing power of your money will decrease due to inflation.

For example, if you had $1,000 dollars in a savings account and you left it there for several years, then by the end of that time you might only have around $900 dollars worth of purchasing power because of inflation.

two hand shaking with the word investing over them
YAYImages ID: 24278344 BY: kentoh

Pros of Investing Your Money 

There are many pros of investing.

For example, you have the potential to earn a large amount of money.

This is because as your investment grows, it can multiply itself and make more money for you, as long as this occurs in an efficient manner.

When you invest your money, it grows due to compound interest and dividends.

If you’re playing the stock market you can also increase your wealth through stock splits. That’s when one share of stock is split into two shares of stock.

The value of each of those shares might go down, but over time, when it goes back up you will have twice the value.

Investing allows you to make returns that over time will be worth more than the initial amount invested. Most of this is due to the effects of compound interest.

You might also enjoy:

Why Am I Bad at Saving Money? Maybe It’s Your Personality…

Why Do People Struggle to Save Money? (It’s Your Parent’s Fault)

Cons of Investing Your Money

There is a higher risk factor in investing because it is not guaranteed to make a large amount of money.

The risk factor in investing depends on how much money you put into one investment.

You may lose some money from the investment when your stocks do not perform well or if they are constantly dropping in value.

When you have something invested, it can take years to become profitable, especially if you are using mutual funds.

Investing also comes with the risk that the company or stock that you have invested in will go bankrupt and cost you everything that it is worth.

Investing carries a lot of risks because if you pick the wrong investment, you could lose the money that you have invested. 

When you invest your money, there is a chance that you could lose it all.

There are also fees and taxes involved with investments, so do your research before making any investments.

a man watering stacks of coins
YAYImages ID: 34989996 BY: kentoh

Different Types of Investments

There are a number of different types of investments. Here is a quick overview of some of the most common that you might encounter.

Money Market Accounts

A money market account is a type of savings account.

A money market account (MMA) has a slightly higher interest rate than your average savings account, but there are limitations placed on withdrawals.

take surveys - earn rewards - cash out

Savings Bonds

Savings bonds are issued by the Federal Government and pay interest to those who purchase them.

The interest rate is dependent on the duration of the bond.

In other words, the longer it is before you can cash in the bond, the higher the interest rate.

Stocks

Stocks are securities traded through brokerage firms that are issued by companies.

The stocks give the stockholder partial ownership of the company and give them rights (and responsibilities) that come with that ownership.

Stocks are traded on the New York Stock Exchange, the NASDAQ, and other stock exchanges.

Exchange-Traded Funds (ETFs)

Exchange-traded funds operate as a traditional investment fund.

A fund manager gathers up investor funds and uses them to buy shares in other companies (referred to index) or stocks that they believe will increase in value over time.

ETFs can be traded throughout the day just like stocks, which makes it easier for investors who are looking for short-term profits.

Bonds

Bonds are a debt instrument (debt is when you borrow money from an entity and promise to pay it back at a later time with interest) that gives the owner rights to the company’s earnings and assets.

The bond has a specified maturity date when its owner can cash it in.

Bonds also have a specified interest rate that is paid each year until maturity.

It will also pay this interest annually until it reaches maturity.

The federal government, state governments, and even cities can issue bonds.

How to Know if You Should Invest Your Money in Stocks or Bonds

If you are looking for more returns, then investing in stocks would be best for you because they come with higher potential returns but also greater risks than investing in bonds do.

You could lose a large amount of the money that you invested in a stock that doesn’t perform well or goes bankrupt and becomes worthless.

You may also enjoy:

Advantages and Disadvantages of Saving Money

8 Top Disadvantages of Savings Accounts

To Sum it All Up:

Investing is better than saving because investing pays dividends but saving does not. Investing also has a higher risk of losing money than saving while still staying at a typical 6% return on investment per year. You will need to consider both the risks of saving money and investing it before you decide what is right for you.

 

Please Note: This should not be taken as financial advice. This article is informational only. If you want to learn more about investing please seek out the guidance of a licensed professional investment broker. 

two signs one says something the other says nothing

How to Live on Nothing

Why Do People Buy Big Houses?