Financial decisions are always fraught with emotion. Not only must we worry about keeping the lights on and the mortgage paid, but we need to be concerned about our future selves as well. Putting some of your hard-earned cash away for a later date is always a good idea so you can be prepared for the unexpected. But is it better to save money in the bank or invest it in the stock market? Here, we’ll dive into everything you need to know about saving versus investing.

If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.

How Do Savings Work?

Most people think of savings as money in the bank, which is a fairly applicable heuristic to use. When we want a safe place to keep our cash, we don’t stuff it under a mattress or inside a piggy bank. Through different vehicles, banks gladly hold onto our cash. Vehicles for savings include:

Savings accounts. A bank account that pays interest on deposits, but usually has certain prerequisites for earning that interest (ie. limited withdrawals, minimum balances). Money in a savings account is FDIC-insured and is at no risk.

Certificates of deposit (CD). A CD is more like a bond than a savings account. When you purchase a CD, you’ll get a better interest rate than a savings account, but you’ll be required to leave your funds with the bank for a specific amount of time (ie. 6 months, 2 years, 5 years, etc.).

Money market accounts. Think savings accounts for big balances. A money market account is less restrictive than a savings account or CD in that you can write checks and use debit. Additionally, money market accounts may pay a higher rate than a savings account, but minimum balances are usually higher.

You may be wondering why the bank offers interest on some accounts. When we deposit money into the bank, it doesn’t just sit in a vault. Banks lend out money through loans and are only required to keep a certain percentage of cash on hand for withdrawals—this is called the reserve requirement rule. The reserve requirement rule limits the number of new loans a bank can make if their on-hand cash falls below a certain threshold.

Pros of Saving Instead of Investing

Explore the pros of saving rather than investing:

Federal Insurance on Your Money

Funds held in banks or credit unions are protected by the Federal Deposit Insurance Company (FDIC) or National Credit Union Administration (NCUA). If the bank is the victim of theft or fraud, your deposits will be insured.

No Market Risk

Not only is your money insured and earning interest, but you have no risk of losing principal in a savings account or CD. Interest rates may vary, but you’ll never get back less than you put in.

Cons of Saving Instead of Investing

Explore the cons of saving rather than investing:

Failure to Match Inflation

Savings vehicles really only have one flaw, but it’s a big one. The interest earned from bank deposits rarely matches the pace of inflation. Your principal won’t be at risk in the bank, however, your purchasing power will be. Diminishing purchasing power on our money is one of the primary reasons we invest in capital markets.

What Makes Investing Different?

Investing differs from saving in a number of ways. First, you aren’t giving your money to the bank for safekeeping—you’re buying a stake of ownership into an operating business. Of course, buying a few shares of a company doesn’t mean you have in a say in company decisions, but it does entitle you to a portion of their profits.

However, if the company you invest in does poorly, there’s no FDIC coming to the rescue. When you buy shares of stock, you’re making a bet on that company. If they underperform their profit goals, your shares will lose value and some of your principal will dissipate.

Pros of Investing Instead of Saving

Explore the pros of investing rather than saving:

Investing Returns Outpace Savings on Average

Stock market returns gyrate each year. But on average, investing in the market over a 10, 20, or 50-year time horizon has the potential to produce greater returns than FDIC-insured products like CDs.

Cons of Investing Instead of Saving

Explore the cons of investing rather than saving:

Your Principal Is At Risk

No risk, no reward is a common cliche in sports, but it applies to money as well. Stocks may lose value, but investors are rewarded for their risk-taking with superior returns over time. Banks are safe, but they pay meager interest rates on deposits.

Saving and Investing: Doing a Little of Both

Saving and investing shouldn’t be framed as a choice between one or the other. A good financial plan involves putting money into a safe place like a savings account for emergencies and unforeseen expenses. But when it comes to saving for retirement, a long time horizon affords us the ability to take on risk in the markets. How much of your earnings you devote to savings and investments is a personal decision, but a good financial advisor can guide you toward the most efficient split. If you’re unsure whether to invest or just sock your money away in the bank, get in touch with an advisor.

Work With an Experienced Financial Advisor

If you have any questions or need help creating a personalized financial plan, reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.