Differences Between Saving and Investing
Q: What are the differences between saving and investing?
A: Your "savings" are usually put into the safest places or products that allow you access to your money at any time. Examples include savings accounts, checking accounts, and certificates of deposit. At some banks and savings and loan associations your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC). But there's a tradeoff for the security and ready availability of these savings methods: your money is paid a low wage as it works for you.
When you "invest," you have a greater chance of losing your money than when you "save." Unlike FDIC-insured deposits, the money you invest in securities, mutual funds, and other similar investments is not federally insured. You could lose your "principal," which is the amount you've invested. That’s true even if you purchase your investments through a bank. But when you invest, you also have the opportunity to earn more money than when you save. There is a tradeoff between the higher risk of investing and the potential for greater rewards.
Q: Are savings bonds a safe investment?
A: Savings bonds are issued by the U.S. Department of the Treasury to pay for the borrowing needs of the government. Because savings bonds are backed by the full faith and credit of the U.S. government, they are considered one of the safest investments available.
Generally, you must pay federal tax on the interest earned on U.S. savings bonds. If you do not include the interest in income in the years it is earned, you must include it in your income in the year in which you cash in the bonds. Savings bonds are exempt from state and local taxes. If your bonds are lost, stolen or destroyed, they can be replaced by the Treasury Department. For more information about savings bonds, visit www.treasurydirect.gov.