Saving vs. Investing
What is the important difference?
Is there a difference between saving and investing? Yes! There is a clear distinction between savings and investing. Both are very important, and they are not the same.
The purpose of savings is to have liquid assets (cash) ready and available for planned (short-term) future expenses, emergencies, and for ‘seed money’. Seed money is money that is available for timely investment opportunities.
Investments are different. Try not to think of your investment account, for example, as a big pile of cash that you will eventually spend off before you die. To own an investment is to own capital. Most of your capital investments should produce income or at least appreciate in such a way that you can sell a small portion of the investment to produce income, in the future. Owning a ‘cash-flow positive’ asset is very different from cash sitting in a bank account.
It is prudent to have an emergency fund of three to six months living expenses saved in a bank account, however, if we keep putting money in the bank indefinitely with no plan for it other than spending it in retirement, we are ignoring the purpose of money. Money is fluid, like water. It is designed to flow. Would you want to drink water that had been sitting in a bank vault for 20 years? I wouldn’t.
Cash is an asset, but because of inflation, it is usually a depreciating asset, and it is not a capital asset unless I intend to make it productive. So, putting money in a bank that earns less than 3% is a bit like burying your treasure in the ground and I don’t want to be accountable on the Last Day for being a hoarder.
“So,” you might be thinking, “is saving for retirement wrong, then? That can’t be right. Everyone knows saving for the future is important.” I am not saying saving is wrong. There is another way of looking at saving.
Spend less than you earn
If you mean by saving, a different kind of spending other than consumer spending, we are getting closer to a definition that has import for our conversation. One of the most important rules of financial management is to spend less money on living expenses and lifestyle than you earn. The household that spends 101% or more of their annual income lives a miserable life of indebted servitude. The household that spends 99% or less of their annual income is free from debt servitude.
Is spending less than your means the only factor in personal finance or is it a bit more complicated than that? We haven’t solved the problem of hoarding. How can a household save for the future without hoarding? The answer should be clear by now. We need to save for the short term (3-6 months) and invest for the long term.
For more information on budgeting, saving and investing, I recommend the book- Catholic Money: A Father Teaches His Son About Family Finances
Interested in getting started right in the investment world? Check out this 7-step video introduction.
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