You're Saving. Should You Be Investing, Too?
Dear Carrie: I've always been a good saver, and now at 29 with a steady job, I have a fairly sizable savings account. My friends are getting into investing, but it seems like such a risk and makes me uncomfortable. Isn't it enough to just keep saving? -- A Reader
Dear Reader: Being a good saver certainly puts you ahead of the game. And having a solid savings account is an important step toward financial security. So first, congratulations on that. But is saving enough? For some things, yes. For other things, no. While saving is about accumulating money, investing is about growing your money. And that can make a huge difference in your financial future.
But let's take a step back and talk a bit more about the what and why of each.
Saving Sets the Stage
Basically, saving is putting money aside for future use. You can think of it as money you have left over once you've covered your essential expenses. Or, ideally, you can make saving a line item on your monthly budget so that saving itself is one of your essentials. But however you look at it, having that money tucked away will help you pay for the things you want above and beyond your daily expenses, and cover you in case of emergency.
And that's all good. Having a sizable savings account can help you stay out of debt and give you the cushion you need should you face an unexpected illness, job loss or expense. Plus, when you want something special like a week's vacation, you've got the money.
But here's the catch. Most people keep their savings in a bank account. The upside is that it's easily accessible and safe; the downside is that it won't earn very much. Money in savings accounts is not likely to keep pace with inflation, which means the money you have saved today can actually lose buying power over time. That's why just saving isn't enough.
Investing Creates the Action
Investing, on the other hand, is about putting your money to work for you with the goal of growing it over time. Here's an example. If you were to put $3,000 each year in a savings account and earn 1%, at the end of 20 years, you'd have about $67,000. If you were to invest that same amount of money and get an average 6% return over the same time period, you'd have nearly $117,000. The sooner you start saving, the less you may need to save because your money gets to work that much sooner. The more you save, the more you have to invest -- and the more those returns can add up.
Of course, as you say, investing involves risk. And the stock market in particular will have its ups and downs. But there are ways to mitigate that risk. The key is to choose a broad range of investments in stocks, bonds and cash based on your risk tolerance and time horizon, and to never put all your money in one particular stock.