Why save and invest (article) | Khan Academy (2024)

You might have heard the terms saving and investing used interchangeably, like saving for retirement when actually you are investing in a 401k. Although they are related, saving and investing are different ways to achieve your financial goals. In this article, we'll explore the benefits of saving and investing, compare the two, and provide tips on how to balance them based on your income, expenses, and objectives.

Saving means putting money aside for future use. For example, you might save money by keeping it in a bank account, where it remains safe and earns a little bit of interest. Some common reasons to save include having money for emergencies, short-term goals like a new phone, or even long-term goals like buying a car or going to college.

Investing, on the other hand, means putting your money into assets that can grow in value over time. Examples of investment options include real estate, stocks, bonds, and mutual funds. By investing, you hope that the money you put in will grow and be worth more in the future. Investing can help you achieve long-term goals, like home ownership or retirement.

There are many ways to save and invest your money. Here are some examples:

• Bank accounts: A safe place to store your money, and you can often earn a small amount of interest.

• Certificates of deposit (CDs): A type of savings account that usually earns higher interest than a regular savings account, but requires you to leave your money untouched for a set period.

• Stocks: Buying shares in a company, making you a part-owner. You can make money if the company's value goes up, but you can also lose money if the company's value goes down.

• Bonds: Lending money to a company or government, who promises to pay you back with interest.

• Mutual funds: A pool of money from many investors that is used to buy a diverse mix of stocks, bonds, or other investments.

When deciding whether to save or invest, it's essential to consider factors like liquidity, risk, return, and time horizon.

• Liquidity refers to how easily you can access your money. Savings accounts have high liquidity, as you can withdraw your money anytime. Investments, however, might not be as easy to sell and convert to cash.

• Risk is the potential for your money to lose value. Saving in a bank account is generally low risk, while investing in stocks or bonds has a higher risk, as their value can go up and down.

• Return is the amount of money you gain or lose on your investment. Savings accounts typically have low returns, while investments like stocks and bonds have the potential for higher returns.

• Time horizon is how long you plan to keep your money invested or saved. Generally, if you need your money soon, saving is the better option. If you have a long time before you need the money, investing can help your money grow more.

Saving and investing can complement each other in helping you achieve your financial goals. For example, you might save money for emergencies and short-term goals, while investing for long-term goals like retirement. By having both savings and investments, you can ensure that you have money available for immediate needs and also have your money growing for the future.

To balance saving and investing, consider the following tips:

1. Create a budget: Track your income and expenses to see how much money you can set aside for saving and investing.

2. Establish an emergency fund: Save at least three to six months' worth of living expenses in a bank account for emergencies.

3. Set clear goals: Determine your short-term and long-term financial goals and decide whether saving or investing is the best way to achieve them.

4. Diversify your investments: Don't put all your money into one type of investment. Instead, spread it across different types of assets to reduce risk.

5. Review and adjust: Check your progress regularly, and adjust your saving and investing strategies as needed.