Rule #1 Finance Blog

With Investor Phil Town

Saving vs Investing: Which Route Should I Take?

The key difference between saving vs investing is that one action stores your money while the other one grows it. 

As Rulers, we want to focus on the method that grows our money, which is investing

Substantial growth is how we create passive income and build wealth that will sustain us later in life, and we can’t achieve that growth through basic savings. 

Whether to save or invest isn’t the question, though. Both are important! It’s how you save and invest that matters.

Saving is your first step in forming good financial habits and having money to put toward investing once you’re ready. But in order to grow your wealth for your future—for things like retirement, vacations, education, kids, etc.—you need to learn to invest in wonderful companies.

Here, I’ll cover the pros and cons of saving vs investing, why you need to do both, and how much to save vs invest depending on where you’re at in your financial journey. 

Let’s dive in. 

What’s the Difference Between Saving vs Investing?

I mentioned at the start that the main difference between saving and investing is that saving stores your money while investing grows it. Doing both is not just good, but essential. 

Having a safe place to store your money, i.e., in a savings account, ensures it’s there for you in case of an emergency, to be used for regular big purchases, or until you’re ready to invest. 

Another big difference between saving vs investing is the perceived risk. With saving, there is somewhat little to no risk of having less than you started with… but I’ll get into that more in a bit.

With investing, there is a risk that you will lose some or all of your initial investment. On the flip side, there is little to no chance that you will make any money off of your savings account, but, if you invest wisely, there is a good chance you will make money off of your investments. 

To understand these differences and how they impact your life, let’s explore how saving vs investing works.

Saving-vs-Investing

Saving

Saving products include standard saving accounts, money market accounts, and certificates of deposit (CDs). Each of these products, which are offered by most banks, is a safe place to hold your money. 

They all also offer some level of interest on the money held in the account. CDs offer the highest amount of interest of the three but also restrict access to your money for a few years; the longer the timeline, the greater the interest rate. 

Regular savings accounts typically offer very little in terms of interest, usually less than 1%, however, this rate fluctuates from bank to bank and is influenced by the interest rates set by the Federal Reserve.

The interest you earn through saving is one of the main reasons I advise Rule #1 investors to not store too much of their money in a savings account for too long. 

Over time, the money held in a savings account loses value because the interest rate cannot keep up with the rate of inflation—and this is what I meant when there’s somewhat no risk of having less than you started with.

There is such thing as a high-yield or high-interest savings account as well, but even these accounts don’t beat the rate of inflation. So while your money may be “safe,” it’s losing value day by day. 

Investing

There are many different types of investments, including stocks, bonds, mutual funds, ETFs, real estate, and so on. Each type of investment carries some level of risk. 

Typically, the greater the risk, the greater the potential for substantial gains or losses. Of these types, bonds are the least “risky” because they’re typically guaranteed by the government, but they also offer the lowest return. Individual stocks, on the other hand, are perceived as the riskiest, but also typically offer the highest return.  

With any investment, the level of risk is determined by how much you know going in. This is why the Rule #1 strategy is built on only investing in companies you understand by thoroughly researching them before investing, and only investing when you can do so with a margin of safety. 

By following this strategy, you can greatly reduce the risk of investing, easily beat inflation, and substantially increase your net worth. 

When to Save vs Invest

While investing is an optimal long-term strategy, there is a time and a place to save, especially if you’re in a tough spot financially or just starting out. If this is you, take two to three years to build up your savings.

WhenToInvest

First, Save Up 

Before you even consider investing or doing anything else with your money, for that matter, it’s a good idea to establish an emergency fund. 

Setting up an emergency fund typically consists of putting an amount of money equal to three-six months’ of living expenses in a savings account that is easy to access. This is your cushion in case of emergency, i.e., you lose your job, your car breaks down, or you incur hefty medical expenses. 

The other time it makes sense to save money rather than invest it is if you will need the cash in the near future. Investing the way we Rulers invest is a long-term strategy, which means you don’t want to touch your investments for at least five years.

So, if you plan to make a down payment on a house in the next few years or your kid is about to go to college, now may be a better time to save the money you’ll need than invest it.  

Then, Invest

For anyone who is in good financial standing, meaning they’ve saved up an emergency fund and don’t have any bad debt, it’s often a good time to invest. 

One of the first reasons to invest and invest early is to save up for retirement. Time is your best friend when it comes to growing your wealth, so the earlier you can invest for your retirement, even if it’s a few hundred bucks here and there, the better. 

Retirement isn’t the only reason to invest, though. Investing for your future, in general, can help you achieve your goals sooner, and perhaps, even help you create passive income on which you can live. The sooner you learn how to invest, the sooner you can begin to grow your wealth and enjoy it. 

Which is Better — Saving or Investing?

Saving is great, but it’s not enough on its own. If you really want to grow your wealth and reach financial freedom, then you need to invest. 

It’s important to both save and invest, and learn how to do so early on. If you can master these financial habits, you can set yourself up for an incredible financial future. 

WhichIsBetter

How Much To Save

If you’re wondering how much you should have in a savings account, start with three-to-six months’ worth of living expenses. If you have a big upcoming expense, such as schooling or a car, save for that too. 

This could mean you’re saving for a few years before you’re ready to invest, but that’s ok. 

Setting aside money every month is good practice for when you’ll transfer funds to your brokerage account later on. If you want to save faster, check out my tips on how to save $10,000 in a year.   

There’s a difference between saving a cushion of money for emergencies, though, and hoarding money in a savings account out of fear of losing it. Once you’ve got your emergency fund and the money you need for the foreseeable future, it’s time to invest. 

How Much To Invest

If you have an emergency fund saved up of three-six months’ worth of expenses, no bad debt, and you’ve covered all your bills for the month as well as any big upcoming purchases, and still have an extra $500, you can invest. 

You’d be surprised at how quickly you can grow your wealth when you start investing the Rule #1 way with even a small amount of money. 

And if you’re just getting started, it’s a good idea to start small. As you continue to learn, get more comfortable with investing, and earn a return, you can begin to invest more. 

The important part is to start. With the power of compound interest, even $500 has the potential to grow into a fortune, but it needs enough time and patience to work. 

How to Start Your Investing Journey

If you’re like a lot of people, you probably have some fear around investing in the stock market. Investing in stocks has been portrayed as “risky” while saving has been portrayed as “safe.” 

But how safe is it if you’re putting your future in jeopardy because you’re losing purchasing power year over year rather than having the potential opportunity to grow your wealth by 10% or 15%?

If you’re considering keeping your money in a high yield savings account vs stocks, you’re missing out on the opportunity to actively grow your money through investing. 

Investment-Plan

So are you ready to create an investment plan

In five easy steps, you can start your investing journey. Simply: 

  1. Evaluate your financial standing
  2. Define what you want to accomplish
  3. Determine how much risk you can take
  4. Decide what to invest in
  5. Establish a timeline

If you’re unsure where to even start and want some guidance along your investing journey, start here with my Webinar and use my new Financial Planner along the way. 

I’ll walk you through these five steps and help you learn how to invest the Rule #1 way so you can start putting your savings to work and grow your wealth.