Saving vs Investing: Which is more important?
Advertiser Disclosure: Our first priority is to provide valuable information to help our readers gain insight into financial topics. Although we receive compensation from some of the brands listed on our site, we only highlight companies we believe can benefit our readers and their financial situations.
When it comes to your financial health, saving and investing money are some of the most important habits you can practice. Unfortunately though, most people don’t have enough cash to do both at the same time.
So should you focus on saving or investing first? The answer depends on how much cash you already have saved up. According to a November 2023 survey, 32.9% of people have no more than $100 in savings- -meaning they’re highly vulnerable to a financial emergency. If you’re like roughly a third of people, you’ll probably need to start with saving first.
Is it Better to Save or Invest?
It’s practically impossible to meet most financial goals without saving money and/or investing. Whether you want to buy a home or eventually retire, saving and investing can be fundamental to reaching your goals. But sometimes you have to prioritize one habit over another. Here’s how to decide which to prioritize:
When to Save
Saving money should be your main focus if both of the following describe your situation:
- You’ve paid off your high interest debt (e.g., credit cards).
- You have less than three to six months worth of your living expenses in savings.
Why should people in this group prioritize saving? Because you need cash available for life’s everyday setbacks. Whether it’s an unexpected car repair, a medical emergency or a seasonal dip in your income, an emergency savings fund gives you immediate access to the cash you need, without any penalties for using the money.
When you have emergency savings, you’re also less likely to do something impulsive and costly when you’re in a bind, like charging the bill to a credit card or taking out a loan from your retirement account.
How Much to Save
If you have a stable source of income and no dependents, experts recommend building an emergency savings fund equal to roughly three months worth of your living expenses. If you have seasonal income and/or dependents, aim for closer to six months.
If that amount seems impossible to save, start small. Try to save $1,000, or just one month’s worth of rent or mortgage payment, and then build from there.
You may also want to save money in a “sinking fund” which is a fund for a specific upcoming expense, like a down payment on a car or college tuition. If you need to build a sinking fund, research how much the total expense will be, and then divide it up over your future paychecks to determine how long it will take to reach your goal. Want to speed up the process? Here are a few ways to save more:
How to Save More Money
- Review your financial statements to find expenses you can cut, like recurring subscriptions you don’t use.
- Set up an automatic deposit to your savings account from each paycheck.
- Put your spare cash into a high-yield savings account (HYSA) to earn more interest on your deposits.
- Use an app that automatically rounds up your purchases and adds the change to your savings account.
When to Invest
You should focus on investing if both of the following are true:
- You’ve paid off your high interest debt.
- If you have more than three to six months worth of living expenses saved for emergencies.
Once you’ve eliminated high-interest debt and saved for emergencies, you’ll want to start investing right away. That’s because when it comes to investing, time is money. In other words, the sooner you start investing, the more your money will grow.
According to J.P. Morgan, if you start investing $200 a month at a 7% rate of return at age 35, you could have $242,600 by age 65. But if you had started at age 25 instead, you’d have $512,700 at age 65. That doesn’t mean you should give up on investing as you get closer to retirement, it just means that now is the best time to start.
How Much to Invest
Many experts recommend investing 15% of your income. If you earn the median U.S. income of $57,200 a year, that comes out to $8,580 a year, or $715 a month.
Is that number too high for your budget? Start with what you have, even if it’s just $50 a paycheck. Here are a few ways you can increase that figure:
How to Invest More Money
- If applicable, max out your employer’s retirement match.
- For self-employed people, invest in a tax-deferred account, such as a Simplified Employee Pension plan or an IRA.
- If you’re saving for a down payment on your first home, invest in an IRA that allows early distribution for first-time homebuyers.
Differences Between Savings and Investing
Saving and investing have a few similar qualities. Both involve setting some of your cash aside for later use, and both can earn you money. But saving money is also different from investing in a few key ways.
Quick Comparison: Saving vs. Investing
| Saving | Investing | |
| Withdraw penalties | None | Potential early distribution tax, income tax and loss on investment value. |
| Return |
|
|
| Common fees |
|
|
| Risk level | Low | Potentially high |
On the other hand, investment accounts historically earn far better returns than savings accounts. While savings accounts do offer guaranteed interest, it’s often not enough to keep up with inflation.
For those reasons, you’ll want to use savings accounts to hold money you may need in the short to mid term, while investment accounts are for cash you’ll use in the long term.
Learn How the Pros Invest
Resolve Unpaid Taxes
Use Motley Fool's Stock Advisor To Invest
- Over 100 Stock Picks with 100%+ Return
- Averaged Stock Pick Return over 350% (vs. 120% for the S&P)1
- 2 New Stock Picks Every Month
- Investment Community With 700,000+ Loyal Members
- 30-Day Membership-Fee-Back Guarantee
- Joy Wallet Reader Deal: The Motley Fool is offering its top stock-picking service for $79 for new members (Limited Time)2
Get started with invested with the platform trusted by the pros
Sign Up To Gain Insight On Other Financial Topics
