What is the difference between saving and investing?

Saving is putting money aside for future use. It's important to save so you can cover fixed expenses, like mortgage or rent payments, and to make sure you're prepared for emergencies. Generally, people put their savings in bank accounts, where up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC).

Investing is when you put your money to work for you. You buy an investment, like a stock or bond, with the hope that its value will increase over time. Investments have the potential for greater returns than you’d receive by putting your money in a bank account.

Savings versus Investing Chart Savings versus Investing Chart Savings versus Investing Chart

The goal of investing is to grow your money over time

In this example from 1997 to 2018, Diego put $3,000 each year in a bank account to fund his short-term spending needs. The interest he received on his money averaged 1% over 20 years, which was relatively low. But the trade-off was that it was safe and accessible. Diego had $67,694 after 20 years.

Over that same period, Alexis was planning for her retirement so she invested $3,000 each year in a moderate portfolio, which returned an average of 6% over 20 years. Alexis had $115,314 after 20 years.

This opportunity to earn more money comes with additional risks—including the loss of some or all of your investment. Different types of investments have different levels of risk, so it's important to understand your risk tolerance Tooltip —or your appetite for risk. If you're working toward a long-term goal, it’s a good idea to consider investing as opposed to saving. Recently, savings rates haven't kept up with the rate of inflation. This means that if you put all your cash in savings, the actual purchasing power of your money could shrink over time. 

Inflation can severely erode your purchasing power over time

This chart shows the impact of inflation on the purchasing power of a fixed, annual $50,000 pension. It’s important to understand the effects of inflation because it decreases the amount of goods or services you can buy (purchasing power), all else being equal. Here we see that with a hypothetical 3% inflation rate, the fixed, annual $50,000 pension can only purchase $37,200 worth of goods or services at the end of 10 years (a 26% loss of purchasing power) and $27,684 worth of goods or services at the end of 20 years (a 45% loss of purchasing power).

Inflation chart Inflation chart Inflation chart

Why should I invest?

Investing can help you achieve financial goals, like buying a home or funding your retirement. By investing, you're putting your money to work to reach these goals. Let’s see how it works.

The power of compounding: A little goes a long way

Alexis invests $3,000 a year for 40 years and receives an average annual return of 6%. At the end of 40 years, her portfolio is worth $492,143. This amount consists of $372,143 in total earnings and her principal investment of $120,000. How did her portfolio grow so much? It’s because every year, Alexis's 6% return is on a new, larger balance (made up of her initial investment, her subsequent yearly investments, and the money she’s earned from dividends and capital gains on the investment). That's the power of "compound returns."

Compounding chart Compounding chart Compounding chart

When should I invest?

Generally, sooner is better. Historically, the longer you invest, the less impact the short-term ups and downs of the market have on your return. 

Many investors sit on the sidelines, waiting for the "right" time to invest. Unfortunately, timing the market is virtually impossible. Instead, consider just getting started and remember this old investing adage: Time in the market is more important than timing the market.

Early beats often

Alma invests $10,000 when she’s 31 and lets the money grow for 20 years. Dave invests $2,000 a year on the same day each year, starting at age 41, for only 10 years. By the time they both reach age 50, Alma has nearly 15% more than Dave even though she invested half as much. Alma has an ending balance of $32,071 compared to Dave’s balance of $27,943.

Saving early beats saving often chart Saving early beats saving often chart Saving early beats saving often chart

How much should I invest?

It depends on how much you have, as well as your goals and timeline (also called your time horizon). But a good rule of thumb is to invest the maximum you can comfortably afford, after setting aside an emergency fund, paying off high-cost debt, funding daily living expenses, and saving for any short-term goals. By investing on a regular basis, over time you can potentially achieve greater returns through compounding Tooltip .

Is investing risky?

Investing has risks. The goal is to manage them. We believe the best way to do this is to have a plan, know when you’ll need the money, and diversify your portfolio.
 
Diversification spreads your money around different types of investments, so you're not putting all of your eggs in one basket. You want to divide your money among stocks, bonds and cash investments based on your risk tolerance and timeline. Dividing even further, you could include different types of stocks, such as large-cap Tooltip , small-cap Tooltip and international. And within those divisions, you could have stocks representing different sectors (for example, technology and health care). The ultimate goal is to own investments that don’t historically move in tandem. 

Investment types perform differently

We believe it's a good idea to own a variety of investment types—like stocks, bonds or cash investments—as they can perform differently over time. In this chart, we see the variation in performance of stocks, bonds, cash and a moderate portfolio that includes all three over a 20-year time horizon.

Diversification chart Diversification chart Diversification chart

What are some common types of investments?

Stocks

Stocks (equities) represent ownership in a company. 

As a shareholder, you can achieve returns in two main ways: 
1.    The price of the stock may increase, allowing you to sell at a profit.
2.    The company may distribute some of its earnings to stockholders in the form of dividends. 

Stocks are considered relatively risky, because the stock price may also decrease and there is no guarantee you'll be paid dividends.

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    How do I choose a stock?

    There are many ways to pick stocks. Longer-term investors can use fundamental analysis Tooltip to research stocks. 

    Shorter-term traders may rely on technical analysis Tooltip , which assumes future market patterns will be similar to previous ones.

    Schwab provides clients with stock screening tools, research and ratings.

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    How do I buy a stock?

    If you know which stock you want to buy, look up its ticker symbol. Then log into your brokerage account and place a trade order. You can do this with a:

    • Market order Tooltip , if you want your order to go through immediately 
    • Limit order Tooltip , if you have a maximum dollar amount you want to spend
    • Stop order Tooltip , if you want to buy once the stock hits a certain price.

    The stock will show up in your account once the order executes.

    Open a Schwab Brokerage account.

Bonds

A bond represents a loan you make to a government, municipality or corporation (issuer). 

In return, that issuer promises to pay you a specified rate of interest and to repay the face value after a certain period of time, barring default.

Bonds can provide a predictable income stream because they generally pay bondholders interest twice a year. They’re also useful for preserving capital, as they promise to repay the original loan amount upon maturity. As with any investment, bonds have risks such as default risk and reinvestment risk. Bonds tend to be less volatile than stocks, but an issuer could potentially default on its loan or have the loan called (this is when an issuer returns principle and stops interest payments before the bond matures).

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    How do I choose a bond?

    The bond market is much bigger and more complex than the stock market.

    If you’re just starting out, bond funds can be a good option as they offer diversification and professional management.

    If you prefer individual bonds, you can start by looking at the issuer's credit quality. Higher-quality bonds tend to offer lower yields with less risk. Lower-quality bonds are riskier—including the risk of default Tooltip —but can offer higher yields. You also want to consider the maturity date Tooltip , when your original investment will be repaid, and the coupon Tooltip , the annual interest rate paid on the bond. 

    Find bond funds.
    Use bond screening tools and research.

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    How do I buy a bond?

    You can buy bonds or bond funds through a broker dealer 

    Learn how to buy a bond.

    Find out more about: 
    Bond funds  
    Bonds

Mutual funds

A mutual fund pools money from many investors and then invests that pool in a broad range of investments, such as stocks, bonds and other securities. 

The fund is managed by an investment advisor. When you buy a mutual fund, you buy a stake in everything the fund invests in and any income those investments generate. Mutual funds make it easy to build a diversified portfolio and get professional management, so you don’t have to research, buy, and track every security in the fund on your own.

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    How do I choose a mutual fund?

    If you seek to outperform the market, consider actively managed funds. It’s important that you understand the fund's investment objective and strategy before investing, as there are no guarantees that the fund will actually outperform. Keep in mind also that actively managed funds tend to have higher expenses.  

    You can also consider passively managed index funds. These funds simply aim to track their benchmarks before fees and expenses. Index funds typically have lower costs and are more tax efficient.

    Learn more about active vs passive funds.

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    How do I buy a mutual fund?

    You can buy these funds either directly from the fund company or through a broker dealer. Just look up the ticker symbol of the fund you’d like to buy and place an order. Note: Mutual fund trades are executed once a day after market close.

    Find out more about mutual funds.

Exchange-traded funds (ETFs)

An exchange traded fund (ETF) is an investment fund that holds assets like stocks, bonds or commodities. 

Most ETFs track market indexes, which means that they’re trying to replicate the performance of a certain part of the market. For example, an ETF that tracks the S&P 500® Index is trying to mirror the performance of the broad stock market. ETFs trade like stocks on an exchange and their price changes throughout the day, as shares are bought and sold.

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    How do I choose an ETF?

    Look for funds that represent the part of the market you’re looking to invest in. 

    Then look at costs. There are three different types to consider: the operating expense Tooltip , bid-ask spread Tooltip , and trading commissions Tooltip .

    To learn more, read ETF vs. Mutual Fund: It Depends on Your Strategy.

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    How do I buy an ETF?

    You can buy and sell ETFs through a brokerage account. Just enter the ticker symbol of the ETF you’d like to buy and place your trade. 

    Find out more about ETFs.

How can I invest without paying a lot of fees?

Every dollar you pay in fees is one that can’t generate compounding returns. That said, investing generally costs money. So what can you do? 

  • Look for brokers that charge low trading commissions Tooltip .
  • Consider funds with low operating expenses Tooltip .
  • Look for no-sales load Tooltip , no transaction fee mutual funds that allow you to buy and sell shares without paying these common fees.

For more on this, read Fees and Minimums.

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