The Seacoast BankNote

Saving vs Investing: How, When & Where To Put Your Money

Saving money was once seen as a surefire way to increase your wealth, but in today's economy, simply stashing it in a bank account may not yield the expected returns.

person calculating savings

The informed saver understands that saving may not yield the expected benefits in today's economy. Many individuals tend to spend their savings, while others may face challenges such as inflation, fluctuating interest rates and volatile currency exchange rates.

We are fortunate to live in an era when a considerable amount of financial information is commercially available. This is the data that previous generations paid financial experts to access. Well, the paywall is gone, but our responsibility has increased. Every individual must now take it upon themselves to understand when to save and when to invest. 

Advantages, Disadvantages, And Things To Consider

Personal Risk Tolerance

It's important to note that even those with a conservative risk tolerance should not dismiss investing. Some may overlook this opportunity due to the misconception that investing always leads to potential losses.

No, personal risk tolerance must be a function of knowing the basics of all the financial tools available to you. Once you learn the real risks associated with using those tools, you can decide how much of that risk you want to take.

Let's look at the basic tiers of savings and investment vehicles that everyone should know about.

Pros & Cons Of Savings Accounts Vehicles

Savings vehicles may also be referred to as cash equivalents because of their proximity to a fixed cash value at a certain point in time.

The Savings Account

In most banks, this vehicle is covered by FDIC insurance up to $250,000. Interest rates vary depending on the size of the deposit and market rates. However, you can trust that your principal will remain secure in all but the most extreme circumstances. In most cases, you want to keep your "active" money here - the money you may use for bills or ongoing payments. Also, many traditional savings accounts currently have interest rates that do not outpace inflation.

The Long-Term Savings Vehicle

If you have money you are not using in the immediate future, you can negotiate a better interest rate in return for a promise that you will let the bank keep your money for a more extended amount of time with a certificate of deposit (CD) account. CDs will usually, and should, outpace inflation. They are also FDIC insured, so this vehicle has no added market risk over the traditional account. 

Savings vehicles may also be referred to as cash equivalents because of their proximity to a fixed cash value at a certain point in time.

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Investment Vehicles

We define the investment vehicle as a non-cash equivalent vehicle that assumes some variable market risk and has the potential for a higher rate of return than fixed-rate savings vehicles.

Mutual Funds

This investment basket has no minimum guaranteed interest rate of return, creating a slightly riskier profile. Mutual funds may hold different risk profiles depending on the investment types they consider.

Depending on the type of company that you are investing in, your risk profile may be average (blue-chip stocks like McDonald's) to extremely volatile (penny stocks such as those representing cryptocurrency companies). Although these single-company investments are much more volatile than investment baskets like mutual funds, they often have the potential for much higher returns.

Treasury Notes and Bills

These are considered some of the safest investments available due to their backing by the full faith and credit of the US government. If held until maturity, they offer a fixed rate of return, with Treasury notes being sold at a discount and maturing after a set number of years.

Municipal Bonds

Bonds are fixed-rate "IOUs" issued by government and municipal entities and backed by their full faith and credit. Because they come from government organizations, they tend to have the same risk profile as Treasury notes and bills. Municipal bonds usually pay a slightly lower interest rate than Treasuries because the interest may be federal and state tax-free for residents living in the state where the bond was issued.

Market Conditions

Knowing what market conditions affect important metrics, such as interest rates for fixed investments, is essential. Those same market conditions may also play a role in the individual performance of volatile securities. This kind of information consistently changes and takes a lifetime to learn, but every person should understand the basics. Being able to interpret certain macroeconomic factors will determine how you spread your money around between savings and investment vehicles.

Low-Interest Rates vs. High-Interest Rates

When interest rates are considered low, it becomes easier for investors to borrow money. When money becomes easy to borrow, speculators enter the market and volatile investments gain volume that may temporarily stabilize them. There are many theories, but ideally, this is how lower interest rates affect the money market.

When interest rates are considered high, money tends to flow towards fixed investments. During this time, savings accounts and other fixed-yield investments will give their highest rates of return. Conservative investors looking for a way to park money without thinking about it will take advantage of macroeconomic conditions. Money also becomes more difficult to borrow because failed speculative investments now incur a higher penalty.

You should consider the current and future interest rates that will coincide with your investment period if you are looking to delve into financial vehicles for any specified amount of time.

Scale and Volume

You may be able to achieve quite a good return on a low-interest fixed savings account if your initial deposit is high enough. A 2% annual return on a $10 million investment yields enough to support most lifestyles. The concern here is not necessarily the percentage yield but the total amount of money generated. At the same time, that 2% rate on a $1000 savings bond may not generate enough total income to be worth it to you. This is something that only you will know as you assess your personal goals.

Your Personal Investment Education

The market risk investors incur when investing is somewhat tied to the amount of education an investor has about a specific investment. There is no "right" or "wrong" trade in the stock market without considering the entry point, the ability to leverage the initial purchase, and timing the exit.

Understanding what these variables mean involves education about the underlying investment and stock market strategies that apply to every security an investor might purchase. The same goes for other investments such as real estate or business investments. Although an industry can be pretty profitable, an individual investor can limit his or her success because of a lack of education about that industry. In this case, it would be better for that person to park money in a fixed-rate savings account that incurs no punishment for a lack of knowledge about the market or any particular industry.

Keep the above in mind when determining how to utilize your money. Neither saving nor investing is a catchall solution that will solve all your problems. Properly managed, however, both vehicle types have the potential to provide stability and even wealth.

Most importantly, do not think you must understand money alone. Even the best investors have advisors. Ensure you make the most of the resources provided by Seacoast Bank. Call or email us for a consultation about any financial questions you may have.

To learn more about your savings and investing options, schedule an appointment with an advisor or simply fill out the form below.

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