Home » Money Matters: The Ultimate Guide to Choosing Between Saving and Investing
Money Matters The Ultimate Guide to Choosing Between Saving and Investing

Money Matters: The Ultimate Guide to Choosing Between Saving and Investing

Investing can be risky, but saving could cost you money.

I had a friend who was 38 years old, single, and made $100,000 a year. She had $9k in savings and $112k in her 401(k) retirement account. Each month, she put $6k into it, and her company matched that amount by 4 percent. Her school loans were paid off not long ago, so she had a “additional” $800 at the end of each month.

A lot of my clients ask me the same thing: should she save or spend the extra money she got? I helped her figure out the answer to that question by making a plan for her money. Here are the goals we came up with:

Set aside $15,000 in cash over the next two years.
  • Cash cushion right now = $9,000.
You should set aside $3,000 a year for trips.
  • Savings on trips right now = $0
Save enough money to live on $60,000 a year until you turn 100 when you retire at age 65.
  • $1.2 million saved for retirement

Clear up your goals to improve your approach.

After writing down her financial goals and how much she needed to save, invest, and earn in interest, we found the answer to her question. This is how much she would need to save and invest each month to meet her goals:

  • $250 a month to build up her emergency fund
  • $250 a month to save for her trip
  • an extra $525 a month saved for retirement, assuming:
  • 8% per year on average before retirement
  • Growth rate per year after retirement = 6%
  • 3% is inflation.
  • The amount of money you would get from Social Security today if you retired at age 67 = $2,630

When this customer asked us whether she should save or invest, we looked at what she had now and figured out how much she could add in the future. What would help her reach her goals on time?

Setting Goal Order

Because the total amount of money she needed each month to reach her financial goals was more than the $800 she had on hand, my client had to decide what to do. What did she want to do with her $800? Save it for a trip, add to her emergency fund, or put more money into her retirement now that she knew how much she needed to put each month?

This is why there isn’t a single answer to the question of whether to save or spend. There are three things that matter: what you need, when you need it, and how much you can afford to give. To help my clients figure out if they should save or invest their money based on their unique situations, I tell them to look at a few key measures.

Short term vs. long term

Most of the time, investing your money for long-term goals like retirement is a better idea because you have more time to recover from changes in the stock market. Putting your money into investments is usually not a good idea if your financial goal is short-term, like for travel, which is generally five years or less. You should probably put it in a high-yield savings account at this point because you won’t have much time to recover from a big drop. You should also think about how much risk you are willing to take and your general financial health.

That’s why I told this client to save some of her extra money for short-term goals and a cash cushion while also saving for her long-term retirement.

What are the pros and cons of saving and investing?


  • Investing: The longer time frame lets interest build on itself, which makes your money grow.
  • Saving: You can access your money whenever you need it without incurring any fees.
  • Saving: You’re not affected by changes in the market.


  • Investing: There is always a chance that your capital will lose value in the market.
  • Investing: If you take the money out too soon, you might have to pay a fee.
  • Saving: You’ll lose out on possible market gains and a sizable amount of compound interest.

To help other people make this choice based on their own needs, I made a quick list. As always, it’s best to work with a qualified financial planner who can help you make the best decisions for your money and your general plan. But this is a great place to start:

Do You Save or Invest?

  • Have you saved enough cash to cover your set costs for three to six months? Put money away if not.
  • Do you need cash quickly for any other short-term goals, like travel plans? Save money if so.
  • Do you think you’ll be able to retire by the age you want to? Buy something if not.
  • Are you aware of the risks that come with putting this money into investments for a long-term goal like retirement? You might not be able to get to it until you’re 59½ years old, and then you’ll have to pay taxes and a penalty. There’s also the risk of volatility, among other things. Are you ready to wait to use your money so that you can benefit from compounding? So, you might want to start putting money into investments.
  • How much of your monthly income do you feel like you’re saving and investing? Where do you feel like you’re not doing enough?

This list isn’t complete, but it’s a good place to begin when you’re trying to picture the future you want, figure out how to get there, and guess how much it will cost. When you have questions about your present and future finances, it’s always a good idea to talk to a financial advisor. They can help you figure out how to reach your goals.

Should you save money or invest it?

That depends on how willing you are to take risks, how much money you need, and when you need the money. Investing can earn you a lot more money than saving in an account, but that comes with danger, especially when you look at it over a shorter period of time.

Were does investing money make you less safe than saving it?

The Federal Deposit Insurance Corporation (FDIC) protects most bank and thrift savings accounts for up to $250,000. This means that if the bank or thrift goes out of business, you won’t lose your money. This is not how investing works. Most of the time, there is no insurance when you spend money. If you want a bigger payout, you’re willing to take the chance that you might not get everything back.
Of course, not all investments are the same. It’s possible to make more money and take more risks with some, but it’s also possible to lose money and make more money with others. Most of the time, the possible reward is greater when the risk is higher.

How much money should I save?

Thoughts change. Most experts say that to be safe, you should keep three to six months’ worth of costs in cash on hand. Today might be a good day. It’s always possible, though, that you could lose your job or get a big bill out of the blue.

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