Why Is Investing So Much More Powerful Than Saving?

Jason Williams

Posted August 29, 2024

When it comes to managing money, most of us have been taught the importance of saving. “Save for a rainy day,” they say. And while saving is undoubtedly important, there’s a more powerful tool in your financial toolkit: investing. But maybe you’re one of the people who’s wondering, “Why is investing more powerful than saving.” Well, I’m hoping to answer that question beyond a shadow of a doubt today. So let’s get started and see…

why is investing more powerful than saving

Why Is Investing More Powerful Than Saving?

Let’s start by acknowledging that saving money is a crucial first step in building financial security. A healthy savings account can provide a safety net in case of emergencies and help you achieve short-term goals. But despite its benefits, saving has one massive limitation that relegates it to a small percentage of your asset allocation. You see, the benefits of saving are limited by one major factor — interest rates.

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Most traditional savings accounts offer interest rates that barely keep up with inflation. Inflation is the gradual (and sometimes rapid) increase in the prices of goods and services over time. We’ve all seen firsthand how it erodes the purchasing power of your money over the past few years.

inflation

And even with high-interest savings accounts paying out relatively high rates right now, they’ve still just barely kept pace with inflation. This means that while your savings account might show a higher balance year after year, the amount you can actually buy with that money may not increase proportionately. And sometimes it might even go down.

The Power of Investing

Investing, on the other hand, offers the potential to grow your wealth significantly over time. When you invest, your money works for you, instead of the other way around. That means you can enjoy it compounding and growing at a much faster rate than it would in a savings account.

Consider this: The average annual return of the stock market over the past century is around 7%–10% each year. And that’s after accounting for inflation. That might not sound huge, but compare that to the interest rates even high-yield savings accounts offer today after accounting for inflation.

A savings account paying 5% interest with inflation at 2% is only really earning 3%. But that’s just one reason why investing is more powerful than saving…

Why Is Investing More Powerful Than Saving? Compounding.

You see, there’s another force at work when you’re investing instead of saving. And it’s called the power of compound interest. It’s when you earn profits on the profits of your initial investments. And it’s the real answer to the question, “Why is investing more powerful than saving?”

In fact, Albert Einstein allegedly called compound interest the “eighth wonder of the world.” Whether or not he actually said this, the sentiment is spot on.

Because compounding is the process where the returns on your investment generate their own returns. Over time, this snowball effect can turn even modest investments into substantial sums.

For example, if you invested $10,000 at a 7% annual return, in 10 years, your investment would grow to nearly $20,000. In 20 years, it would be worth around $40,000, and in 30 years, you’d have over $76,000.

why is investing more powerful than saving compounding

This exponential growth is the key reason why investing can significantly outperform saving in the long run.

Taking on Risk for Greater Rewards

While we’re discussing why investing is more powerful than saving, there’s one thing we must also cover. And that’s the fact that all forms of investing come with risks. The value of your investments can go up and down, and there’s always the possibility of losing money.

However, over the long term, the risk of investing tends to decrease. Historically, the stock market has always recovered from downturns and continued to grow. And the longer you hold onto your investments, the more likely they are to turn a profit. You can see that fact in action in the following study of S&P 500 returns over various lengths of time:

why is investing more powerful than saving time

One key to managing risk is diversification — spreading your investments across different types of assets, industries, and geographies. This way, if one investment performs poorly, others may perform well, balancing your overall returns. A second key is having a solid strategy and sticking to it over time. And we’re here to help you with both of those.

Saving for Stability, Investing for Growth

The smartest financial strategy often involves both saving and investing. Your savings account should be your foundation — a secure place for your emergency fund and short-term goals. But if you’re looking to truly build wealth, achieve financial independence, or especially retire early, investing is the ONLY tool that can help you get there faster.

And if you haven’t started investing yet, don’t worry. Because there’s no better time than now. The earlier you start, the more time your money has to grow. But you’ll be surprised how fast the profits can add up even after a short time investing.

Also, remember, you don’t need a lot of money to begin taking advantage of how much more powerful investing is than saving. With options like ETFs, mutual funds, and even partial share purchases, it’s easier than ever to start investing with just a small amount of money.

So start today, and let the power of investing transform your financial future.

To your wealth,

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Jason Williams

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After graduating Cum Laude in finance and economics, Jason designed and analyzed complex projects for the U.S. Army. He made the jump to the private sector as an investment banking analyst at Morgan Stanley, where he eventually led his own team responsible for billions of dollars in daily trading. Jason left Wall Street to found his own investment office and now shares the strategies he used and the network he built with you. Jason is the founder of Main Street Ventures, a pre-IPO investment newsletter; the founder of Future Giants, a nano cap investing service; and authors The Wealth Advisory income stock newsletter. He is also the managing editor of Wealth Daily. To learn more about Jason, click here.

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