Saving vs. Investing: What to consider with your money

Savings and investments both play important roles in a financial plan, but they serve different purposes. As a general rule, many financial experts recommend keeping three to six months of expenses in savings for emergencies, along with money you expect to need within the next few years. Investing generally makes sense for goals at least five years in the future.

Deciding how much to save vs. invest depends on your goals, timeline and financial situation. It's not about choosing one over the other but understanding how each supports different parts of your financial plan. Here's how to find the right balance.

What are savings for?

Savings are for money you want to keep secure and accessible. That includes cash in a savings account or money market account, where you can withdraw funds when you need them without the risk of stock market losses.

Savings are typically used for your emergency fund, which can help cover unexpected expenses such as a job loss, car repairs or medical bills. Savings can also help you prepare for goals you expect to reach within the next one to three years.

The tradeoff is that savings accounts usually offer lower long-term growth potential than investments. If your savings interest rate trails inflation, your money loses purchasing power over time as prices rise.

You may prioritize savings when you have less than three months of living expenses in your emergency fund, are paying off high-interest debt or need cash for an upcoming major purchase like a new car or a vacation.

What is investing for?

Investing puts money into assets with long-term growth potential, such as stocks, bonds and mutual funds. These investments may have the potential to offer greater long-term returns than savings accounts and may outpace inflation. Investments involve market risk and may fluctuate in value over time. Returns are not guaranteed, and it is possible to lose some or all of the amount invested.

Another advantage to consider is the potential impact of compound returns. While both savings accounts and investments can benefit from compounding, investing in assets with higher growth potential may allow your money to build on itself more significantly over long periods. Keep in mind that depending on the investment, reinvesting returns may involve transaction costs or specific account rules.

Investing generally makes sense once your emergency fund is in place and you're saving for goals at least five years away, such as retirement, college expenses or building wealth over time. That gives you more time to wait out market swings.

Balancing your money: 4 financial priorities to consider

When deciding whether to save or invest first, it can be helpful to view your finances through the lens of multiple, competing objectives. Here are four common areas individuals often review when determining where to direct their money.

1. Building an emergency fund and managing debt

Building enough savings to handle an emergency or paying down high-interest debt can help ensure that unexpected expenses do not force an individual to rely on debt, such as credit cards, which can result in high-interest costs.

2. Evaluating an employer 401(k) match

If your employer offers a workplace retirement plan, such as a 401(k), you consider making contributions and potentially receive employer contributions as well. For example, if your employer matches contributions up to 4% of an employee's salary, allocating money toward that retirement account helps ensure you aren't missing out on extra funds intended for your long-term growth potential.

3. Saving for short- and medium-term goals

Another key factor in deciding where to direct cash is your specific timeline for upcoming expenses. For milestones expected within the next one to three years — such as buying a car, planning a wedding or making a down payment on a home — many individuals prioritize traditional savings or money market accounts. Because these timelines are relatively short, keeping the funds in a secure, stable account can help protect the money from short-term market drops that could disrupt those plans.

4. Aligning remaining funds with longer time horizon

For financial goals that extend further out, individuals often look beyond traditional savings accounts to match their money with an appropriate time horizon. When exploring these options, it is important to distinguish between bank savings vehicles and market investments:

• 3–5 years: For goals a few years away, some individuals look to fixed-term bank options such as CDs, which are typically FDIC-insured and offer a fixed return in exchange for leaving the money untouched for a set period. Others may explore market-based investment options depending on their goals, time horizon and tolerance for risk. Unlike bank deposits, investments are subject to market risk and can fluctuate in value. Investors may lose principal, particularly if investments are sold during unfavorable market conditions.
• 5+ years: For distant milestones like retirement or building wealth over decades, long-term investments like stocks, mutual funds and exchange-traded funds (ETFs) are frequently considered. While these investments introduce higher volatility and the risk of principal loss, they have historically provided higher growth potential over extended timelines, allowing investors more time to potentially recover from market downturns.

Savings and investing habits to consider

Once you know how much to save before investing, the next step is to make both a habit. These best practices help you do just that:

• Set a monthly savings target: The 50/30/20 rule can help you decide how much of each paycheck to put toward savings goals and investments. Under this approach, 50% of income goes to essential living expenses, 30% to wants or discretionary spending and 20% to savings, investing and paying off debt.
• Keep savings separate from day-to-day cash: Consider opening a dedicated savings account instead of keeping everything in your regular checking account. That creates a clearer line so you don't accidentally spend down the savings. Savings accounts typically earn more interest than checking accounts.
• Schedule automatic transfers into savings and investment accounts: With automatic transfers that you don't have to think about, you pay yourself first to ensure your financial goals stay on track.
• Take advantage of retirement accounts: Depending on your eligibility, individual retirement accounts (IRAs) and workplace retirement accounts offer tax benefits that may help you save more for the future.
• Review the plan regularly: Revisit your savings and investing plan once a year, or after a major income or life change. As your situation evolves, adjust how much you put toward savings and investments.

Your savings and investments work best together

Saving and investing are not competing goals. Savings help protect you in the short term, while investments offer the potential to build long-term wealth. Together, they support a more complete financial plan.

As you prepare for the future, explore Citizens savings account options and learn how Citizens Savings Tracker® can help you set and track your goals.