Over the years, I’ve taught many workshops and classes that involve topics directly or indirectly related to saving money. During such times together with students of all ages (and I mean ALL ages), I’ve often sensed a low-level, often hidden, sense of confusion about what “saving” really means.
We all quickly grasp, of course, that advertisers in this country (and the world over, for that matter), have hijacked the term, “saving,” to mean “purchasing a good or service for less than the ‘standard’ price.” Regardless of the completely different (and worthy) topic of what “standard price” might mean, saving should NEVER be used in the context of spending money… unless we’re talking about saving money ahead of spending it.
Saving should have nothing to do with spending but, rather, the very opposite: accumulating. Saving is not hording, nor it is related to avarice. In fact (and here’s the kicker), it is only mildly associated with Investing.
I know, I know. I get that a lot.
In fact, confusing the two terms (saving and investing) is as frustrating to financial experts as interchangeably using the terms “marketer” and “advertiser” might be to individuals in those professions.
While both Saving and Investing involve money and, more specially, not spending it, that is about where their similarities end. The largest difference between the two has to do with their end games (why do we do either?):
- Savings = Setting aside specified amounts of money in order to pay for fairly near-future specific expenses (expected or not). It is usually low risk and low return.
- Investing = Putting money into a venture with the expectation (certainly never guaranteed) that it will return more money to you than what you put in, even taking into account fees, inflation and interest rates. Investing involves higher risk but usually higher returns.
What’s the big deal about understanding the difference? The deal is huge! First of all, individuals who think of the two as one will do things like put money into savings accounts or CDs (Certificates of Deposit) for decades and think their preparing for their retirement.
Savings accounts and CDs are great for saving for near-future spending, but awful for long-term investing. Why? Because the interest they return is rarely (if ever) equal to their returns.
In plain English: you’ll never get back the same spending power that you put in.
Since inflation typically runs somewhere in the 3.4% neighborhood on an average year, and since savings accounts (and CDs for that matter) return under 2% annually (actually 1% or less when we’re talking about savings accounts), any money you put in will actually lose spending power month after month after month.
Investing, on the other hand, most commonly involves purchasing stocks (individually or in mutual or exchange traded funds), bonds (essentially government or corporate debt), and real estate. My caveat in including real estate under investing is that it does not include buying the home that you live in. Buying real estate to develop or even rent out can usually be expected to return more than what we put in. However, most people actually put more money into their place of residence than what they gross on the sale of their home five, ten or even twenty years down the road, especially when you take into account interest, taxes, insurance, and maintenance. That said, it’s still ALMOST always better than renting (in which case you get NOTHING back).
So, here’s a table to help clarify the differences between Saving and Investing, keeping in mind that a mix of the two might actually be appropriate, depending upon the time frame and dollar amounts involved:
|Being Able to Retire||X|
|Building an Emergency Medical Fund||X|
|Building Your Net Worth||X|
|Buying Christmas Presents||X|
|Coming up with a Down Payment for a Home||X|
|Paying for Vacation||X|
|Paying for Your Child’s College||X||X|
|Paying for Your Next Car||X|
I hope this helps, especially if you have your retirement “savings” in a savings account rather than an investment account. For investing advice, please find a financial adviser to discuss your specific situation.
Happy Saving and Investing!