To Save or To Invest?

In this chapter we will talk about some specific principles in saving and investing. Before we do however, we must define these two terms. Many use them interchangeably, but they are not the same. Savings is for a short-term goal such as an emergency fund or a vacation. i.e. “I am saving for my vacation in July, or I am saving to buy someone a special present.” Investing is indicative of a long-term goal such as a child’s education fund or retirement. When you invest, your time horizon is generally different than when you save. Since your goals are different, you need to place the funds in different vehicles in order to achieve or reach your goal. I will often use the term vehicle to describe a particular investment or savings instrument. For example, if you and I were at the mall and we chose to leave and go to another store, we would get in our vehicles to arrive at our new destination. If I chose to drive a motorcycle and you drove a school bus, we would arrive at our destinations at different times. I would get there faster than you and I would probably take a lot more risk in doing so, thus we used different vehicles to achieve a similar goal. With that being said, you do not place your savings in the same type of vehicles that you would use for investing. Since the required end result is different, the means to the end should be different as well.

An example of a savings vehicle would be a certificate of deposit, or a money market account. It is liquid and has no market risk. It does have inflation risk, but that is acceptable since we realize there is no “perfect” vehicle for every goal. An example of an investment vehicle may be a mutual fund or common stock. The time horizon is longer than our savings goal, so we can afford to take some market risk in the hopes of receiving a much higher appreciated account value when we need the funds. You save for a rainy day, but you invest for the future. Please be sure to match the best vehicle to your goal. Many do not, and they become disappointed when they lose their savings in the market, since this bucket of money was ear-marked for a goal that could not sustain market risk, thus it was inappropriately assigned. Notice I said the assignment was inappropriate, not the investment. You cannot blame the vehicle for “losing money.” That’s what it is capable of. If you utilize the wrong tool for the job, you cannot blame the tool for the outcome.