The Difference Between Saving and Investing

The terms “Savings” and “Investing” are often used synonymously while they actually are quite different. In this blog, we are going to discuss the differences between the two.

First, let’s look at savings accounts. The rates that a savings account may offer can vary depending on where you bank. We often see savings accounts that brick-and-mortar banks and credit unions offer fluctuate around .02%. Another savings account you may have heard of is a high-yield savings account (HYSA). The rates on these accounts are higher compared to traditional savings accounts and fluctuate in regard to the fed funds rate. Most HYSAs don’t have a brick-and-mortar building attached, allowing them to offer higher rates. When withdrawing money, you may receive it immediately, all the way up to three business days, depending on the bank, the amount of money, and where you want it to be sent. Savings accounts are FDIC insured up to $250k and people commonly use these to keep their emergency fund (3-6 months of expenses) and short-term cash needs.

Now, let’s talk about investment accounts. These have several names associated with them such as brokerage, individual, joint, and taxable. These accounts are opened through broker-dealer firms, allowing you to hold stocks, bonds, mutual funds, and ETFs. These accounts are typically used to invest for long-term financial goals. You have the ability to open an investment account as a retail client and self-manage, or through a financial advisor on the institutional side. A perk to being on the institutional side is having access to certain funds that the retail side does not. Once cash is deposited and funds have been bought, you are now an investor! You can anticipate having greater returns (depending on what you are investing in) in the long term compared to a savings account, but you can also expect market volatility.

So, you’ve put money into an investment account, what about taking money out? If you know you are going to need cash soon, it is best to inform your financial advisor ahead of time so they can look for a good day to make sales. ETFs and Mutual Funds have settlement dates that are typically 2-3 days after the trade is placed. Because of this, once sales have been made, it can take up to three business days to settle, as well as an additional three days for it to reach your bank account. Knowing that it can take this long to reach your bank account can help you plan for what you need to keep in your savings account vs your investment account.

Both savings and investment accounts are great ways to save money for your future, and it is important to know when to use which type of account to allow your money to work for you. Saving for short-term goals and wanting less risk would be the main reasons to use a savings account. Saving for long-term goals like retirement, college education, or requiring a greater return would be reasons to use an investment account.