As many as 84% of college students follow a budget, according to a College Finance survey, which is a great starting point when you’re managing your own money. However, the survey also found that far fewer students are doing anything to save and invest. Saving and investing are important habits to start because they can help you achieve financial independence. Saving involves preserving your money in a safe place, usually for a short time frame, while investing involves buying assets you hope will increase in value over a longer term. When you start saving and investing in college, you’re less likely to fall into debt because you have a financial safety net. Your investments also have a longer time frame to grow before you need to tap them for things like home down payments and retirement. Because saving and investing differ in a few key ways, it’s important to understand how they work and how to do both. Here’s what to know.

Saving: A closer look

When you hear people talk about “saving money,” it typically refers to opening a savings account at a bank or credit union. You can deposit and withdraw funds anytime, and the account may pay interest on your funds in the form of an annual percentage yield (APY). Your financial institution sets the APY and may change it at any time, but your earnings are still predictable.The goal of saving is to preserve your money. You may go this route if you want the security of knowing you have funds for emergencies or short-term goals, like a car down payment, a vacation or a large purchase. Your money is also protected against bank failure if your bank or credit union offers deposit insurance.

Example of how savings may grow

Let’s say you put $100 into a savings account that pays a 5% APY. After a year of contributing $20 a month, you’re guaranteed to earn about $11 in interest (assuming your bank or credit union doesn’t change that APY). Savings account interest rates are the highest they’ve been in decades, which means it’s a great time to open a high-yield account and start contributing funds. However, some financial experts predict those rates will eventually go back down. So while you won’t lose your principal (the money you contribute) in a savings account, at some point you may start to earn much less interest.

Investing: A closer look

In general terms, investing involves buying assets—like stocks, bonds and shares in a mutual fund—hoping they’ll be worth more when you eventually sell them. One popular option is opening a brokerage account to buy and sell these assets. Many college students use investing apps because they simplify the process, which can be especially helpful for beginners. For instance, Acorns is an app that rounds up the purchases you make using your linked debit or credit card. Then Acorns sweeps the change into a brokerage account and invests the money into a diversified portfolio of exchange-traded funds (ETFs). You can earn money if the value of your assets rises. But it’s also possible to earn nothing at all or lose everything you’ve contributed. That’s the risk of investing. And while you can withdraw money from an investment account, you’ll have to sell investments to do so. This may result in paying taxes, fees and penalties. Investors take on these risks, costs and inconveniences because they know investing generally helps your money grow over time.

Example of how investment may grow

Let’s say you open a brokerage account and buy $100 worth of shares in a mutual fund, then contribute $20 a month to the fund for a year. You’re not guaranteed a return as you are with a savings account. Instead, your earnings depend on the performance of the mutual fund. The S&P 500 is a widely used benchmark for the performance of the stock market overall, and it returned an average of about 10% a year in the past decade. Using that average, your investment may earn about $23 over the course of a year. But S&P 500 returns have also gone as high as 31% and as low as -18% in recent years. If your money is still invested, then its value would go up and down with those highs and lows.  

How to choose

When it comes to saving vs. investing, you don’t have to choose one over the other. Financial experts usually suggest doing a combination of both. For instance, you could first establish an emergency savings fund. The amount you save is up to you, but one rule of thumb is to save enough to cover at least three to six months’ worth of expenses. This helps ensure you won’t have to go into debt when emergencies arise.Once you’re happy with your emergency fund, you could make saving and investing part of your monthly budget.

• Save: Your savings account should be used for emergency expenses, like unexpected car repairs, and short-term savings goals. Some banks and credit unions let you set up various buckets within your savings account, which can help you organize and separate your funds.
• Invest: Depending on your budget, you may decide to invest a small amount each month to get into the habit while in college. Over time, you can increase your contributions for long-term goals like retirement.

Saving Investing Risk Minimal: Your savings balance won’t decrease, and deposit insurance protects you against bank failure within guidelines. Higher: You may lose money, earn a return or break even, based on the investment’s performance.Returns Predictable: Calculate your earnings based on the stated APY and term. Fluctuating: The value of your investment depends on the asset’s performance.AccessImmediate: You can deposit and withdraw funds anytime. Delayed: You may need to sell assets to withdraw money from your account, and you may have to pay taxes and penalties in some cases. Best uses Short-term goals: Savings accounts are a good place to store emergency funds or money you’ll need within the next three to five years. Long-term goals: Investment accounts are a good option for long-term goals like retirement and higher education.