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Is Saving Enough?

Is saving enough? For some things, yes; for others, no. Saving is about accumulating money, while investing is about growing it. That can make a major difference to your financial future.

Saving Sets the Stage

Basically, saving means setting money aside for future use. Ideally, make saving a line item in your monthly budget so it becomes an essential expense. Alternatively, as many people traditionally do, think of it as money left after covering essentials. Either way, money set aside helps pay for things beyond daily expenses and provides protection in an emergency.

Savings offer a cushion for "future matters," often the protection you need against an unexpected illness, job loss, or expense. And when you want something special, such as a week's vacation, the money is available.

However, savings can also be at risk, whether in a bank or under a mattress. Economic forces may be beyond our control, but that is another story. The point is that saved money does not grow, and it risks losing value during or after inflation. That is why saving alone is not enough.

Investing Creates Action

Investing, on the other hand, means putting your money to work with the goal of growing it over time. For example, depositing $3,000 annually into savings earning 1 percent gives you about $67,000 after 20 years. Investing the same amount at an average 6 percent return over that period would produce nearly $117,000. The earlier you start saving, the less you may need to save because money starts working sooner. The more you save, the more you can invest—and the more those returns can add up.

Of course, investing involves risk, and the stock market has ups and downs. Some education and caution about prospective investments help mitigate that risk.

Time is another important factor. A long-term approach is essential to weather market downturns. At your age, you have time to stay invested through inevitable lows. The key is staying invested during them while focusing on long-term growth potential.

Each Plays an Important Financial Role

Saving and investing are not mutually exclusive. How they work together depends on your goals and when you expect to need the money. Saving for a vacation or a down payment? Money for short-term goals is better kept out of the stock market. Retirement savings? That is a different story.

Here is one possible saving and investing approach:

  • Keep enough cash for 3 to 6 months of essential expenses in an accessible savings or money market account, or short-term CDs (certificates of deposit).
  • If you expect to need money within five years, avoid stocks. Stick to cash and bond mutual funds and ETFs (exchange-traded funds).
  • Include broad-based stock mutual funds or ETFs when you know you will not need the money for at least five to seven years. 
    This is especially relevant to retirement savings.

Start Investing—Now

Already saving? Do not stop there. Investing can feel daunting, so take it step by step. If you have a 401(k), that is a great starting point. Talk with friends and family. Plenty of information is available online, and many financial companies offer free automated assistance to build a portfolio reflecting your goals and timeline. Learn all you can, ask questions, and do not hesitate to seek professional advice.

Remember, nobody stays healthy by avoiding a bicycle and remaining on the living-room couch.