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Invest vs. Save – Why to Invest Money

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Is investing better than saving? I’m going to be showing you the importance of investing your money. Investing can be extremely intimidating! But it is important and worth learning about.

I was inspired to write this post after a friend of mine told me all his money was in the bank (if you’re reading this you know who you are :P). Hopefully this post can help you understand the importance of investing and getting in early!

Let your hard-earned money work for you! Especially if you’re young, the opportunities are endless!

If you are brand new to investing, check out this post on investment basics! Learn what the market is, how exactly it works and some general terminology to start getting your investment feet wet!

Quick note: Although this post is mostly to convince you to start investing keeping some money (like an emergency fund) in a savings account is better than investing! Check out this post on the 4 must have savings account types!

Quick note #2: Sign up for my email list to get access to my FREE resource library! Additionally, track your financial progress with my Ultimate Wealth Planner! This is the exact spreadsheet I use to track my finances and you can use it too!

Let’s get into it: invest vs save. 

invest vs. save

What is the difference between investing and saving?

Saving money and investing money are both very important, but they are very different. Saving money and keeping it in a bank account means your money is just sitting there.

Typically, banks provide you with some interest but the average interest rate for a savings account, according to bankrate.com, is about .06%. With most big banks like Wells Fargo, Chase and Bank of America at .01%. And yes, I mean .01%, which is one one-hundredth of 1%. Aka basically nothing.

Investing however, is when you are putting your money into the market. By “into the market” I mean you are buying a part of a company, you benefit when these prices go up. This was very broad, so if you want to read more about investing read this post on investment basics for more information.

The average stock market return rate is 7% every year. Yes, you could gain more than that in any given year, but in the long term, you’ll be getting about 7%.

Let’s do some math.

You start off with 10,000 dollars on January 1.

By December 31, one year has passed so how much money would you have if you left that ten thousand dollars in your savings account or invested it? We’re going to be using the averages for these calculations.

Savings Account:

  • Amount Earned: (10,000 *.06%) = 6
  • Ending Balance: 10,006

Investment Account:

  • Amount Earned: (10,000 *7%) = 700
  • Ending Balance: 10,700

So, would you rather have gained 6 dollars or 700 dollars? You can start to see the major difference between investments and savings. Additionally, this isn’t even considering inflation!

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What does inflation mean?

Inflation means the gradual rise of prices over time. Alternatively, inflation is the decline in purchasing power.

But what does this actually mean?

For example, Investopedia has a great post about inflation where they compare the prices of coffee. In 1970, you could buy a cup of coffee for 25 cents. Now finding a cup of coffee for 25 cents would be basically impossible. 

So inflation means that prices go up over time. What we were once able to buy for 25 cents we are no longer able to buy, so your purchasing power (aka what we are able to buy) goes down.

The average yearly inflation is 3%. This means, if we were able to buy something for 100 dollars at the beginning of 2021, it would cost 103 dollars at the beginning of 2022. So if you are keeping your money in a savings account, it is decreasing in value. You would no longer be able to purchase that 100 dollar item, because it would be worth 103 and you would only have 100.06 now.

Let’s do the same example considering inflation.

This is a general example to make it easier to understand!

You want to buy something, maybe a car for example, that costs 10,000 dollars, but you wont need the car for a year. So you decide to save the money. However, when it’s time to buy the car a year has passed, so it is now worth 10,300 dollars instead of 10,000 because of inflation!

Savings Account:

  • Amount Earned: (10,000 *.06%) = 6
  • Ending Balance: 10,006
  • Cost of the Car: 10,300
  • Lost Money: (10,006 – 10,300) = 294

This means you LOST 294 dollars by keeping it in a savings account. Your money decreased in value by 294 dollars.

Investment Account:

  • Amount Earned: (10,000 *7%) = 700
  • Ending Balance: 10,700
  • Cost of the Car: 10,300
  • Lost Money: 0
  • Gained Money: 400

This means you had a net GAIN of 400 by investing your money. You would have been able to buy the car and pocket 400 dollars extra!

This is a conservative calculation because typically when talking about market gain, the 7% already considers inflation. The market return is actually around 9% or 10% but because of inflation it’s brought down to 7%.

Meaning you could have a bigger gain than just the 400 dollars. But I’m risk averse so I like calculating a bit more on the conservative side.

Your money is LOSING VALUE if you leave it in a savings account.

Yes, it is important to keep some money in a savings account for paying off your bills but anything more than that is a lost opportunity. If you want to keep a fully stocked emergency fund I would recommend keeping this money in a high yield savings account with a credit union.

I previously had my emergency fund with Wells Fargo, where I made about 16 cents a month. ONLY 16 CENTS A MONTH PEOPLE!! This was absolutely mind blowing and dissatisfying. After switching to a credit union, I now make $48.56  a month in interest with less money in the account.

I personally use Evansville Teachers Federal Credit Union and they give 3.30% APY every month. To try and find something that better combated inflation. At least this way, on average the value of my money is staying the same.

There are some caveats, like having 15 monthly debit card transactions, having a monthly direct deposit, enrolling for paperless statements AND having less than 20k in the account. Which, let’s be honest, you should never have more than 20k in your bank account unless you’re about to pay a down payment. I digress, that could be a whole other blog post! (Let me know in the comments if you want to know more about this!)

However, I think the small inconveniences of owning the account are well worth the interest I receive in return. If you’re still at a bank that only gives you 0.01% interest, I’d consider switching! They aren’t helping you get the biggest bang for your buck.

The importance of investing early.

Now we know the difference between a savings account and an investment account and the role inflation plays. Let’s take that one step further.

Time and compound interest.

What is compound interest and how is compound interest calculated?

The examples above showed us how important an interest rate can be. However, compound interest means you aren’t starting from the same amount every year. Let’s take the same example we were discussing above.

You start off with 10,000 dollars. In an investment account you ended with 10,700 dollars and in a savings account, you ended with 10,006 dollars. So, when you enter year two, these are your two new starting values. That’s confusing so let’s do more math.

Savings Account:

  • Year 1
    • Start: 10,000
    • Amount Earned: (10,000 *.06%) = 6
    • Ending Balance: 10,006
  • Year 2
    • Start: 10,006
    • Amount Earned: (10,006 *.06%) = 6
    • Ending Balance: 10,012

Investment Account:

  • Year 1
    • Start: 10,000
    • Amount Earned: (10,000 * 7%) = 700
    • Ending Balance: 10,700
  • Year 2
    • Start: 10,700
    • Amount Earned: (10,700 * 7%) = 749
    • Ending Balance: 11,449

Your money grows at a significantly higher rate when investing because of compound interest!

Definition of Time Value of Money

Time is another thing I wanted to talk about. Because of all the factors mentioned above, time becomes a huge contributing factor with investing.

As you can see from the example, by the end of year two, we have almost 1,500 dollars MORE than at the beginning. That’s just in two years! Image 3 year, 5 years, what about 10 years down the line??

So what is time value of money? The definition of time value of money is the idea that your money is worth more now than in the future. Investing allows you to grow your money significantly. If you are waiting on investing you are actively LOSING MONEY. 

Whatever money you have in your bank account  today, when you’re reading this, is worth more now than it will ever be worth. Investing it today, instead of waiting, is the best decision if you want to grow your earnings.

They say your money can DOUBLE after 10 years in the market, (on average, assuming a 7% market gain). Without paying another penny. I don’t know about you, but doubling my money by doing absolutely nothing…. That sounds pretty fucking cool.

Final Thoughts

So what are you going to do? Invest vs. save?

Saving with Sofi is all about being intentional with your money. Let your money work for you! Saving money is hard on its own, so don’t let your money lose value by letting it sit in a savings account!

I know investing can be intimidating but there are plenty of services that can help you out! I use Betterment as my robo-investor. This means I deposit money and they take care of the rest. Based on the risk level I select, they choose index funds for me and make sure I am diversified! 

Although they do have a fee, it is quite small. I personally think the headache and time it takes to figure out what to invest in and make sure I’m diversified is worth the small fee charged. Betterment is not the only robo-investor option however, so make sure to do your own research and figure out what works best for you and your situation!

I hope you enjoyed this post! Don’t forget to pick up your very own Ultimate Wealth Planner to track your finances! This is the exact budget template for google sheets I personally use! Additionally, join my email list for FREE access to my resource library! 

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