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Investing and saving are terms used interchangeably in the financial industry but there is a clear distinction between them.
Do you remember the Aesop parable about the Tortoise and the Hare? A tortoise and a hare set off for a race. The hare brags he’s so fast, he’ll leave the tortoise in the dust. The hare mocks the turtle, thinking he has the race in the bag.Halfway through the race, the hare figures he has enough of a lead on the tortoise so he decides to take a nap under a tree. As he is sleeping, the tortoise slowly surpasses the hare and crosses the finish line first.
The hare was overly confident, overestimating his own ability as a sure-win while underestimating the tortoise’s perseverance and steadfast pace. The hare lost the race because he decided to take a risk when he took a nap, losing out to the turtle in the end. The moral of this parable is “slow and steady wins the race” and fast and furious risk-takers do not. So how does this parable correlate to managing your finances? Imagine investing like the hare and saving like the tortoise.
We do not need to take on risk in highly volatile investmentsin the stock market or mutual funds to obtain financial freedom. This is the fast and furious method and it doesn’t always work. Instead, by having a solid financial foundation first we can build wealth in a safe and secure manner, slowly over time if we are willing to be consistent and steadfast in our financial planning and expectations.
Saving vs. Investing: What is the Difference?
In the financial services industry, we are often misguided as to what saving our money means compared to investing our money. Most see saving money as a short-term goal towards acquiring something: a new car, a trip, or simply putting enough money aside in an emergency fund. Saving money requires putting it away in a safe and guaranteed vehicle with little to no risk but also little to no return. The one downside is we are taught saving our money doesn’t allow us to “grow” our money. Saving doesn’t make you wealthy, but investing does. Or so we’ve been told.
Investing money implies “saving our money” to “grow our money” with higher returns. This involves greater risk though. Yet if we invest our money for the long-term, hopefully we will get a higher return. Or so we hope.But this is a fallacy.
The problem with this definition is it “implies that money invested will always grow, and we know that is not always the case,” says Stephen Devlin, President of MacDev Financial Group and the leading expert on Bank on Yourself™ in Canada. “With investment, along the potential for faster growth, always comes the risk for greater loss.”
Therefore Devlin maintains a more accurate distinction between saving money and investing money should be the following:
“To save means to put money in a vehicle that is safe, protected from loss, and has guaranteed growth, and to invest means to put money in a financial vehicle or asset that has a certain amount of risk and no guarantees of growth,” he says.
To save money doesn’t imply you have to gamble away your money. But with investing it does. Banks are essentially asking you to put your money on the line, with the possibility of losing it all. But it’s us who feels the financial losses when the stock markets tumble. For example, the US Federal Reserve’s widely publicized 2010 Survey of Consumer Finances, showed that between 2007 – 2010 American’s wealth plummeted nearly 40 percent due to the collapse in home values and the stock market. The survey says this downturn in the US economy was the greatest seen since the Great Depression. The instability of the economy that led to the 2008 global recession sent the stock market into a tail spin that has still not fully recovered to this day. There is no guarantee in investing your money in stocks and mutual funds anymore.
Delayed Gratification vs. Instant Gratification
Basically when it comes to making your money work for you, saving is a better strategy than investing. It’s predictable. You get out what you put in. But we live in an instant gratification society and one of the biggest drawbacks of this is that we are convinced if we want to create real wealth and get rich as quickly as possible, investing in the stock market is the only way. The problem is we don’t really take a step back and think about the risks involved when we do. Returns on traditional stock market investments are at all-time lows and the future of the stock market isn’t looking much brighter.
For example, an article in the Guardian newspaper titled “The Golden Age of Investing is over; get used to Wall Street’s ‘new normal’ suggests that the exceptionally high returns of previous decades is no longer in the cards for investors. The new normal is volatile markets and mediocre returns. Gone are the abnormal high returns experienced prior to the 2008 recession from a 1980s onwards bull market. Consulting company McKinsey reports these ‘high return’ conditions don’t exist anymore and investors need to adjust their expectations and behaviors accordingly.
One way is to shift our perspective and learn an approach of delayed gratification. This just doesn’t extend to investing but also how we spend and save our money. We need to become more methodical and less impulsive in our decision making.
Delayed gratification is really about learning to think before doing. It is the ability to wait for something in the future after you’ve saved for something. However, we’ve been programmed to buy something the minute we want it, despite the fact we don’t always have the money for it. Those who are able to avoid huge levels of consumer debt have mastered delayed gratification. They are able to identify the differences between wants and needs and look at the long-term picture of how their money will work best for them.
“One of the biggest mistakes we make with our money is that we don’t train ourselves to actually save it. We are good at spending it but not necessarily saving it. We live in an instant gratification society of easy credit to get whatever we want instead of learning what our grandparents and great grandparents learned—don’t buy something unless you have the money for it,” advises Devlin.
Every time we spend without thinking we take on the risk of getting deeper into debt. The same principle applies to investing. We are seeking instant gratification of getting rich without factoring in the potential risk. We need to be more diligent and find ways we can save money to create a secure financial foundation that doesn’t require us having to potentially lose money.
“Most of us flip the traditional financial pyramid over and plan from the top down investing money we can’t afford to lose before we save money for life’s unexpected emergencies. This approach is all wrong. We need to first build a strong of enough financial foundation that can sustain and protect us. How we do this is in the form of saving and establishing a “liquid cash” reserve that is equal to three to six months your household income at the minimum,” suggests Devlin. “A sizeable liquid cash reserve fund will protect you in case of disability, the loss of a job or an unexpected family emergency. With today’s unstable economy, this is more important now than ever.Slow and steady saving will beat out risky investing every time.”
To learn more about how you create a liquid cash reserve through a secure, safe and predictable savings vehicle, go to www.bankonyourself.com
