Saving vs. Investing

What’s the difference between saving and investing? Some people might think the two are the same, but they couldn’t be more wrong.

Saving

Definition: the money one has saved, especially through a bank or official scheme.

More simply put – saving, the act of not spending money. This can be very difficult to maintain, sometimes even more tedious than going to the gym. In fact, regularly saving money just seems pretty boring.

So why not just spend it all on stuff you want to buy? Well, we all need cash reserves for unexpected financial emergencies such as job loss, family situations, injuries, and more. Determining the specific amount you would need for this is a custom calculation based on a number of factors. There are many ways to save (cash stashed at home, offshore accounts, etc.); however, we’ll focus on the traditional method of depositing excess cash into a bank savings account.

Let’s say you save $100 per month into a bank account and you’re lucky enough to get 1% in annual interest. You’ll be putting away $1,200 per year and after 10 years you will have put away $12,000. With the 1% interest from the bank, you’ll have approximately $12,683 to your name (assuming interest compounding from the bank). If you keep going for another 10 years (a total of $24,000 saved), you’ll have approximately $26,700. Definitely not the most exciting result, but at least you’ll have that extra cash when you need it. Also, money in bank accounts are generally insured for up to $250,000, so won’t have to worry about losing anything.

But what about that extra $683 you made over 10 years? Or that extra $2,700 you made over 20 years? Many people get discouraged from this and may not even bother saving at all. In order to even think about retiring from saving only would require a much larger dollar amount, which most people do not have access to. If you’re looking to make anything substantial and useful, then you might want to consider investing.

Investing

Definition: to expend money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.

Or in other words – the act of putting your money to work with the intention to make a profit. Generally speaking, a good investment is something that makes money, and a bad investment is something that loses money.

There are literally hundreds of different techniques, strategies, vehicles, methods, tactics, schemes, and programs, so it’s easier to identify what’s not an investment versus attempting to cover every single type of investment out there.

What’s not an investment? Remember, the end result of the expenditure of money defines if it’s an investment or not. College tuition for your child? Nope. The latest flat-screen TV to watch your movies in 4K clarity? Forget it. That nice set of furniture that will probably last over 50 years? Try again. Getting your house painted? Sorry.

These are all examples of expenses, so none are investments. I know some of you will want to argue about “investing in your child’s future”, or “increasing the value of your home”, but the reality is that your child’s education is not expected to give you a profit (unless you have some sort of contract written up between you and your child), and painting your house is a maintenance expense which does not increase the value, it only keeps the value from decreasing (it’s also not a deductible expense, unless we’re talking about investment properties which is completely different and outside the scope of this article).

Now, I’d love to talk all about the different types of investments out there and which are better than others, but for the purposes of this article, we’ll keep it simple and assume we’re buying into a moderately performing investment account with a net return of 8% per year. Yes, that is possible and some investment accounts make even more. The best thing is that it’s not going it to the bank so they can then invest your money instead and keep the difference and give you your 1%.

Let’s use that same example of saving $100 per month, only this time you invest it. You’ll still be putting away $1,200 per year and after 10 years you will have still put away $12,000. Here’s where it gets very different. Assuming that 8% net return every year and with the magic of compounding, that $12,000 invested will be worth approximately $19,097 ten years later. If you kept going for another ten years (for a total of $24,000 invested), it will be worth approximately $61,485. This is a considerable difference compared to the $26,700 result from the bank savings example.

But what if you want to make more than 8%? Maybe you’ve heard of some amazing stocks out there that have made hundreds, or even thousands of percent return since they were listed on the market. If you invested in something that generated a return of 100%, you doubled your investment. If you invested in something that generated a return of 1,000%, you multiplied your investment by 10 times. These unicorns do exist, but are quite difficult to find, and many do not end up being the stars of the market.

There is also the very real potential of losing the money you invest, which is incredibly dependent on the specific risks and a number of other factors linked to that investment. Most savvy investors, from individuals to institutions hire professional portfolio managers to navigate the complicated (and sometimes nerve-wracking) environment of the stock market. Yes, you can always do it yourself if you have the time and experience, but professional managers do not let the daily ups and downs of the markets affect their investment decisions and typically have a set strategy for each of the accounts they manage, eliminating the emotional factor which can very destructive to the returns of an investment (think buying high and selling low – the opposite of what you should be doing).

So what now?

Whether you start by saving something small in a bank until you feel comfortable with investing or you jump right in, the most important thing to do it is to do something. Even if you’ve been investing for years, don’t be afraid to try new things and take some risks sometimes. Of course before making any decisions you would want to consider your own specific situation and time frame, and always consult with a professional for tax and/or legal advice.

Shameless Plug

Our firm, BFG Wealth Management, focuses on specialty investment portfolios based on the two primary markets: equity (stocks) and real estate. You can open an account within minutes with BFG Digital Advisor and get access to our exclusive specialty portfolios with no minimums to start. Our management fees are institutionally priced and we never charge commissions for any investment. Our portfolios are directly managed, using proprietary analytics to determine the ideal mix and investment holdings.

#investing #retirement #saving