Saving vs. investing: What to know and how to choose the right strategy for you

Whatever your situation may be, it’s wise to take a moment to consider your financial goals and ask yourself whether they’re best served by building up savings somewhere you can keep that money liquid, or whether you should invest it in an effort to make that money grow.

It might once have been thought that you needed $1,000 or more to start investing in the stock market. If you didn’t have that much, perhaps you’d have felt the decision was made for you: save. Today, you can invest in an index fund that tracks the return of the S&P 500 for just $1, setting yourself up for a potential return that beats inflation—and then some.

“While investing in a diversified portfolio representative of the entire market will likely yield a greater return on your investment than a high-yield savings account over time, there is also a correlating risk with that potential gain,” says Alissa Krasner Maizes, founder of investment advising firm Amplify My Wealth.

Read on and we’ll help you analyze what you should know about the risks and potential rewards of both saving and investing.

Saving vs. investing: Which is better? 

Saving and investing are often lumped together as the sole alternatives to spending money, but each strategy has its unique considerations. 

In general, you opt to save to preserve your money and opt to invest to grow your money. Depending on your specific goals and when you aim to reach them, you will likely choose to do both—at least at some point over the years, even if you don’t start them simultaneously.

“When deciding whether to save or invest your money, it is essential to prioritize determining when you will need it,” says Maizes. “For shorter-term goals, it is best to ensure your money is easily accessible and not likely to fluctuate in value significantly.”

Here’s a high-level comparison of saving and investing.

When it’s important to save

Saving money is best when you have immediate or near-term expenses that your monthly income wouldn’t cover on top of your usual spending. It can take time to build up savings for dedicated expenses, but doing so means you can avoid taking on high-interest debt because there’s a guaranteed pot of cash to pull from.

“When you save your money, you know exactly what your return will be. While you will lose purchasing power due to inflation, you know your return won’t be lower than that,” says Laurie Itkin, a financial advisor and wealth manager at Coastwise Capital in San Diego.

Saving money can be helpful for: 

• Unexpected emergencies: More than half of Americans are unable to afford a $1,000 emergency expense, according to a 2025 Bankrate survey. Setting aside cash in a savings account beforehand can prevent you from turning to credit cards or other expensive borrowing options when a crisis arises. 
• A home or car down payment: When buying a house or a car, a larger down payment may help you qualify for a lower interest rate and better loan terms. If you’re planning to make one of these purchases within the next three years, it’s best to keep your money intact and accessible in a savings account, rather than risking losing it in an investment.
• Travel spending: An upcoming vacation where you’ll be spending more than you typically would at home is a good reason to build a cash cushion in a savings account. 
• Homeownership expenses: The cost of owning a home doesn’t end when you get the keys. There are property taxes, insurance, and home maintenance costs to plan for.

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How to start saving 

Choosing which account to open for your savings can be as important as how much you save. 

“I advise my clients that any money they are going to need to spend in the next two to three years should not be invested in stocks,” says Itkin. “You do not want to have to sell during a bear market and risk losing principal.”

Various financial products, from a high-yield savings account to a certificate of deposit (CD), can offer similar flexibility to a checking account, but with a much higher rate of return. When you don’t need short-term access to your money, but still want to avoid the risk of investing in the stock market, a government bond could be a good fit.

Here are the top savings vehicles to consider for your money:

• High-yield savings accounts: Like a checking account, you have free rein to deposit and withdraw your money when you use a high-yield savings account, making it a good option if you need ongoing access. Online banks and credit unions may offer high-yield savings accounts which pay in the vicinity of 10 times more interest on your balance, compared to the lower rates offered in traditional savings accounts at banks with brick-and-mortar branches. 
• Money market accounts: Similar to high-yield savings accounts, money market accounts come with additional ways to access your balance, such as an ATM card or checkbook. These accounts may in some ways be thought of as a hybrid between a checking account and a savings account. You can generally earn a higher interest rate than with a checking account while having more flexibility than a savings account. But, you will likely have to maintain a minimum balance in your MMA account.
• CDs: This is a savings vehicle that offers a higher interest rate than a bank savings account because the money is locked up for a period of time that you choose, usually one, three, or five years. And not only is the APY typically higher, it’s also usually fixed. That means you’ll earn the same amount for the entire CD term, rather than being subject to variability as with a standard savings account.
• Treasury bills: Often referred to as T-bills, these are low-risk, short-term government bonds. You can buy T-bills in $1,00 increments and cash in, with interest, in short order. Terms range from a few days to one year.
• I bonds: Another type of low-risk government bond that ties its interest rate to inflation and can last up to 30 years. You can redeem an I bond after 12 months, but you’ll lose some interest if you redeem it before five years. You can buy I bonds on TreasuryDirect.gov for as little as $25 or up to $10,000 a year.
• EE bonds: Government bonds that are designed for long-term savings, EE bonds earn interest monthly with the guarantee that your balance will double in 20 years. They have the same purchase limits as I bonds.

After you’ve picked an account type for your savings, it’s time to shop for the account itself. Here’s what  to look out for to make sure you’re maximizing your return and keeping your money safe:

• Fees: Monthly maintenance fees can eat into your balance. Many online banks no longer charge these recurring fees.
• Minimum deposit or balance requirements: Many banks will let you open a savings account with $5 or less, but some may require a higher balance to earn the top APY or charge a fee if you don’t meet the minimum daily balance.
• APY: The APY is the account’s annual percentage rate, which refers to how much your balance will grow over time. It takes into account how often the interest that you earn compounds.
• Term length: CDs and bonds have specific term lengths, unlike savings accounts. These enable the banks, credit unions, and Treasury to offer a higher rate, since they get to hold on to your money for longer.
• Early withdrawal penalties: Since CDs and bonds have specific term lengths, there will also be penalties for cashing in early. In many cases, you’ll lose the last three months of interest.
• Possible tax consequences: The interest you earn on savings is usually taxable, but how much depends on the financial instrument you use. Interest earned on government bonds is exempt from state and local taxes.
• Insurance: Be sure to choose an FDIC-insured bank or NCUA-insured credit union for protection in the event of an institutional failure.

When it’s important to invest 

For financial goals that are at least three to five years away, the benefits of investing—broadly speaking—generally outweigh the risks.

“When setting aside money for a long-term goal, there is a greater likelihood that if an investment’s value decreases, there is still time for it to recover,” says Maizes.

Here are situations when it probably makes sense to invest:

• Securing your retirement: Social Security benefits only replace about 39% of the average retiree’s previous income, and very few Americans have access to pension plans anymore. Investing your own money in stocks and bonds, beginning as early as possible, gives your money the chance to grow beyond low, single-digit APY you can earn in a savings account. 
• To build generational wealth: If one of your goals is to pass assets on to the next generation, investing can help you grow and ultimately preserve the value of your wealth over many years.
• To generate income: Investing in bonds, dividend-paying stocks, or real estate can produce a recurring income stream while also growing your principal investment. 
• You have excess cash: If your savings accounts are flush and your income covers your current expenses, consider putting some of the extra cash to work so that your purchasing power isn’t eroded by inflation. 

How to start investing 

As with saving, certain investment vehicles are better suited to specific goals than others.

If you’re planning for retirement or building wealth to pass down to your kids or grandkids, for example, you have decades of investing ahead of you. An account that’s designed for long-term use can minimize taxes on your earnings along the way.

There are three main types of accounts you can use to invest:

• Brokerage: These are often referred to as taxable accounts, because the earnings are subject to taxation when you collect them. You can open a brokerage account through a robo-advisor or at an investment firm such as Fidelity or Charles Schwab.
• Retirement: While you can invest for any goal in a brokerage account, there are specific accounts designed for retirement goals that let you set aside some of your income before it’s taxed and defer any subsequent taxes on investment earnings, unless you take out the money before you retire. Popular accounts include IRAs and 401(k)s.  
• Education: A 529 savings plan may offer the chance to grow the money you’re planning to use for a child’s future high school or college expenses without paying taxes on the investment earnings. Some state plans even offer tax breaks when investors contribute. You can open a 529 plan at a retail firm and choose how to invest your money in stocks, bonds, or funds.

As with savings accounts, there are a number of factors to consider when shopping for an investment account. Look out for management fees, investment minimums, investment offerings, and withdrawal and contribution rules.

“When choosing to invest, do not overlook the correlating expenses that will impact your ability to reach your goals sooner rather than later,” says Maizes. Opting for a broadly diversified portfolio of low-cost index funds and ETFs is the best way to reduce the costs of investing—including risk—while still benefiting, she adds. 

The takeaway

Over the course of your life and career you’ll need to both build up savings and make smart investments. The question, of course, is which one is best to prioritize right now.

A key priority should be building up an emergency fund that can cover approximately three to six months of expenses. You’ll want to put this in a high-yield savings account so it’s readily accessible while still earning a strong APY. And when it comes to investing, one of the first things you should do is take advantage of an employer-sponsored retirement plan if one is offered to you, especially if it comes with a monetary match to your contributions.

Beyond that, consider saving your money if you’re working toward short-term goals such as buying a car or making a down payment on a house. But consider investing when you’re looking toward long-term goals, and are willing to leave your money untouched as the market fluctuates.