Just like there is great confusion over the difference between investing and speculating, there is also a lot of confusion out there regarding the difference between investing and saving.
Investing and saving are two completely different things, yet a lot of guys mix these two things up.
Saving is the act of putting money away for either short to medium-term usage or to handle an unexpected emergency. Your savings is money you’ve earmarked for either of these two purposes.
For this reason, any funds in savings should A) be very low-risk, and B) be very liquid. Examples of savings would be:
- Actual cash you have somewhere
- A savings account at a bank or credit union
- CDs (ideally with maturities at a year or less)
- Treasury bills (or your country’s equivalent)
- Money market account at an investment firm
The goal of savings is not to make money or even make a good return. Today, with interest rates so low, you won’t make much money on your savings anyway, even if you tried. That’s okay. Your savings are there to hold cash that you’ll need (or think you’ll need) relatively soon.
Investing is very different. Investing means you’re putting money away for the extreme long-term, usually anywhere from three years all the way until when you’re very old (decades down the road). You plan on never touching that cash until you are older. You can move your funds between investments whenever you want, but you’re not planning on actually taking that money out and spending it for a very, very long time (if ever!).
Therefore, unlike savings, investments are (generally speaking) less liquid, more risky, and have higher returns. Examples that would fall into the investing category would be:
- ETFs and mutual funds
- Real estate
- Commodities (gold, silver, oil, etc)
- And so on
You’re probably thinking, “Duh, I know all of this,” but the odds are good you’re not acting on it. I’ll give you several common examples.
Some guys put a hunk of money in to stocks (either actual stocks or stock ETFs) and consider that money savings, meaning they’re using their stocks as a glorified savings account that they can draw from whenever they want for emergencies or to save up for a vacation.
Nope, that’s stupid. If you want an emergency fund or if you want to save up for a vacation, putting that money into stocks is a very dumb move. That money could vanish when you need it the most, and/or you may have to pay fees to pull that money out. Instead, that money should be cash, either with you or at a bank/investment house. I realize you won’t make very much money as a return, but that’s not the point of savings.
Other guys set up some kind of low-risk money market account and think they’re investing. They dump tons of money into these accounts for their long-term growth, and the money just sits there making 1.2% a year.
Again, not a good idea. Having cash as an investment is okay (more on this in a minute), but only if it’s part of an overall diversification strategy with other investments that are not cash (and thus have a much higher return than cash). Having 25% of your investment portfolio as cash is fine, but having 90%+ of your investment portfolio as cash isn’t a great idea (unless that cash is a temporary holding bin from which you will place into other investments soon, as in within 1-2 years at the most).
I have cash in both my investments and my savings. For savings, I have cash (in various forms, listed above) as part of many different savings accounts that I use for many different purposes. When the time is appropriate to use these accounts for their predesignated purposes, I pull out the money and use it.
Then I also have another bucket of cash that I consider part of my long-term investment portfolio. This cash I never touch, ever, other than to move into other investments (and usually not even that).
The point is I don’t have a bunch of cash just sitting around; every dollar in my savings or investments has a very specific purpose attached to it, and I have a very clear delineation between savings, investments, and speculations. You should do the same.