Saving vs. Investing: Where Should You Put Your Money?

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Sep 29, 2017
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Article, Personal Finance, Stocks, Budgeting, Investing

Warren Buffett, perhaps one of the most well-known investors (and philanthropists) of our time, once said, “Do not save what is left after spending, but spend what is left after saving” (EOC POTPOURRI: Financial Literacy Edition). These days it’s all too easy to follow the mantra “treat yo self” and spend your hard earned money on things you don’t necessarily need the minute you get that direct deposit notification. So how much should you save every time you receive a paycheck?

This article from USA Today explains, “the average American saves less than 5% of [their] disposable .income,” and challenges the idea that the money you save each pay period should solely go into your savings account. In comparison, if you’re looking at the long-run, it’s better to diversify and invest in stocks because you’ll see a higher rate of return. Savings accounts are great if you want to know that your money is in good hands, but the APY (annual percentage yield) is usually so minimal today that it barely makes a difference. Most savings accounts have APY’s of 0.6%, and the higher end of that isn’t that much better at a mere 1%+.

If you want to play it safe and will need the funds within five years, then savings accounts are a good backup. Just know that you are probably losing ground to inflation which typically averages 2-3% per year. If you’re looking to really see your money grow over time, then diversifying your savings and investing in stocks is the way to go. The video in the article explains that you'd make, on average, an extra $3.3 million by the time you retire simply by investing!

The current trend of Americans saving money for retirement--among other things--shows a steady decline in the amount they set aside each pay period (USA Today). Perhaps this is due to the rising cost of student debt that many graduates have accumulated, or maybe this decline in savings can be attributed to the fact that the minimum wage has not increased concurrent with inflation. Regardless, it’s always a good idea to save a percentage of your disposable income for the future. Whether it’s saving for a big-ticket purchase (car down payment, anyone?), setting money aside in case of emergencies, or investing in your retirement fund, the aforementioned article has a video which explains the basics of splitting your savings in order to receive the maximum return down the road.

Questions  (from video ):

  • Do you think that putting your money in a savings account is a bad idea?
  • Why do you think that most millennials are not investing in the stock market?
  • What are the assumptions that go into the $3.3 million figure quoted in the story?
    • What percentage of salary would they need to save? 
    • Over what time period would they be setting this money aside (i.e. how many years would they need to commit to saving)?
    • Assume a starting salary of $50,000 at age 25, find an online calculator to figure out what the return would need to be in order to get to $3.3 million at age of 65. 
  • Why do you think investing in the stock market has higher returns than a savings account? 

If you liked this article, be sure to check out our lesson guide on saving basics, as well as our lesson guide on stock investing. In addition, we have a project for students on investing that is tailored to fit Common Core Standards!

 

 

Picture credit: https://steemit.com/money/@cryptonet/savings-vs-investing-it-s-time-you-should-know-the-difference-and-make-your-life-better

About the Author

Danielle Bautista

Danielle is a native of Southern California and a recent graduate from the University of Maine, where she braved the frigid winters—a feat in and of itself—and earned her Bachelor's degree in International Affairs. She has a passion for working with non-profit organizations and serving populations in underprivileged communities. When Danielle isn't writing NGPF blog posts, spearheading various outreach projects, or managing contests and flash surveys, you can find her doing some sort of outdoor activity, learning a new hobby, or cracking what she thinks are witty puns!