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Why save and invest

Saving and investing are two important ways you can take control of your financial future. Saving allows you to set aside money for future use, while investing allows you to grow your money over time. Both have benefits for varieties of goals.

Saving and investing: what's the difference?

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

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

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.

Saving and investing options

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.

Savings vs. Investing

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.

How saving and investing can work together

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.

Check your understanding: saving or investing?

Save or invest?
Examine the items displayed on the left side of the screen. If an item is something you would save for (rather than invest in), drag it to the box on the right.
house
phone
retirement

Tips

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.

Want to join the conversation?

  • piceratops seed style avatar for user LoloR21 .
    "Bank accounts: A safe place to store your money, and you can often earn a small amount of interest".

    How does that work in US banks? By depositing money in a bank (in a savings account), will it pay me interest?
    (4 votes)
    Default Khan Academy avatar avatar for user
    • sneak peak yellow style avatar for user William Wang
      You can usually find current interest rates on the bank's website.

      The bank appreciates you entrusting your finances with them — you are essentially investing in that bank. The bank uses those finances to invest in other markets. As a token of gratitude, they give monthly interest so that you might continue banking with them.

      There are different types of banks, and many usually offer low rates for savings accounts. However, you can try to invest your money in a high-yield savings account and get more significant sums of interest every month.
      (6 votes)
  • purple pi purple style avatar for user France
    can I start investing with only $500?
    (4 votes)
    Default Khan Academy avatar avatar for user
    • aqualine tree style avatar for user David Alexander
      The short answer is "yes". You can start investing with only $500. But perhaps a more useful thing to consider is whether or not you have enough resources SAVED first to make you sufficiently safe financially. Invested funds are harder to access in an emergency, and getting them may come with loss of some of your gains.

      So, $500 is enough to begin investing, but it may not be the wisest place to put those dollars.
      (6 votes)
  • blobby green style avatar for user HollyM
    Whats the purpose if you don't know and don't have enough to buy or save? Who can instead of you in your family.
    (1 vote)
    Default Khan Academy avatar avatar for user
  • aqualine ultimate style avatar for user PiKitty
    For the check your understanding, I selected a gift and a phone as something you would save for, and it is marking me wrong. Does anyone know what the correct answers are? A phone and gift seem like short term things I would save up for, not invest in.
    (2 votes)
    Default Khan Academy avatar avatar for user
    • male robot donald style avatar for user Prince
      Yeah you're right sometimes stuff like that happens where they mark you wrongly, common sense tells me that nobody invests into something like an iPhone since it depreciates in value once the next new iPhone comes out, you also can't invest into a gift since you need to save money to buy it and give it away.
      (1 vote)
  • blobby green style avatar for user amykdy
    For the check your understanding, why can't retirement be something I would save for? Although investing is also an option, I feel like many people save up money so that they can retire...
    (2 votes)
    Default Khan Academy avatar avatar for user
    • male robot donald style avatar for user Prince
      Look into inflation cost of food, shelter, education etc are all going up. Compound interest can also work against you from an inflation standpoint.

      $1,000,000 in 1980 now has the buying power of $230,982.70 in 2024. This means that even if you save $1M cash you might have as much money by the time you retire.

      You need to have your money invested into something like the S&P500, stocks etc for compound interest to work for you, the rich buy assets and make money work for them.
      (1 vote)
  • leafers seed style avatar for user Benjamin
    Where do you go to lend bounds and invest in stock?
    (1 vote)
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  • blobby green style avatar for user zscholl1
    good time my will read do it
    (1 vote)
    Default Khan Academy avatar avatar for user
  • aqualine ultimate style avatar for user lydia robinson:)
    whats the easiest way for me to make a budget?
    (1 vote)
    Default Khan Academy avatar avatar for user
  • duskpin ultimate style avatar for user Grayク
    how much money is good to start investing and what are some reliable things to invest in?
    (1 vote)
    Default Khan Academy avatar avatar for user
    • male robot donald style avatar for user Prince
      $1000+ any lower and you probably should just save more money, make sure to google anything you don't understand, you can Dollar Cost Average into the S&P 500 for lower risk and still benefit from compound interest.

      If you really wanna make a bunch of money you should do your own research a random comment from a khanacademy won't teach you enough, apps like reddit or youtube can be useful to learn more about stocks, bonds, precious metals, crypto, why saving money can mean losing buying power due to inflation(food prices increasing etc).

      Read books like The Intelligent Investor by Benjamin Graham, look into fundamental analysis and technical analysis.

      Study people like Warren Buffet(Billionaire Investor), Charlie Munger etc.

      You can also watch podcasts, make sure you understand what you are doing and do not outsource your thinking and buy just because some dude told you to yolo into a meme coin or stock going to the moon.
      (1 vote)
  • blobby green style avatar for user imrawani838
    how old are you
    (1 vote)
    Default Khan Academy avatar avatar for user