What is the difference between saving and investing? This is a question I received during a free portfolio analysis session from a millennial who was interested in getting involved in the markets.
Hats off to the young man who at an early age is interested in the markets. Hey, who doesn’t want to end up like Warren Buffet?
Throughout this article, we will go through what some of the differences may be but then focus on the number one difference between saving and investing.
Differences Between Saving and Investing
Savings are monies put away for a rainy day or to gain interest (peanuts). Saving are typically products or places that allow access to money at any time. Think of this as a savings account.
Full disclosure, I have a Goldman Sachs online savings account that I use.
The good news for savings accounts, and specifically like the one I mentioned above is that your assets are FDIC (Federal Deposit Insurance Corporation) insured up to $250,000. This insurance makes it very very very difficult to lose that money.
The tradeoff here being in exchange for access to your money at all times, you are paid a very small interest rate. Goldman Sachs is offering 1.05% currently for online savings accounts. However, this is the tradeoff we make for it being virtually impossible to lose your money here (unless the government gets rid of cash and enacts negative interest rates, but that’s a whole other story :)).
There are a few things one could “save” for; a car, a house, college, emergency funds, anything really. Saving is typically associated with saving for a future purchase.
Investing, on the other hand, allows for more of a chance to lose your money when compared to keeping a balance of under $250,000 in a savings account. Unlike FDIC insured deposits, only the cash not invested that is sitting in your brokerage account is insurance up to $250,000.
Obviously, with investing, you are not limited to the interest you receive in a saving account. However, the upside is far rosier than 1.05%.
But some would ask..what about bonds?
Well, bonds are an interesting thing to discuss these days as interest rates have been rising at a rapid pace since the election in the US. The most “trusted” bonds that are considered as “risk-less” as they come are the US Treasury Bonds. Right now on a 30 year US Treasury Bond, you can receive a 3% coupon on your money each year. While these bonds are still seen as the least risky bonds (sometimes even considered a commodity), the United States currently has 20 trillion dollars of debt, and as interest rates rise so do the payments on that debt. The only way for the government to keep on paying back bond holders would be to raise taxes. It is a lose-lose situation if it ever gets there.
The Difference Between Saving and Investing
In my book, there is no difference between saving and investing.
Both are done to grow money.
Both are done with an end goal (start a business, college tuition, a house).
If you are investing in the stocks that are most liquid and have the most participation, you can have access to your money just as quickly as if it were in a savings account.
For example, if you have $10,000 in a Chase savings account and you would like to have that money next day all you need to do it request a transfer. If you have $10,000 in Apple stock, because it is so liquid, you could sell your shares in less than 5 seconds through any online brokerage and have the money in your account right then and there. Just like if it were in a Chase bank, you could request the money and have it next day as well.
But the big problem is, if you want to grow your money for anything, you should invest it. Plain and simple. Investing for the future is saving for the future.
One of the issues with investing in bonds is the length of time your principal amount is tied up for. Yes, you receive coupons (interest payments) twice a year, but the initial amount will be tied up for the duration of the bond. In the example of the 30 year US Treasury Bond, your principal amount is in the hands of the US Government for 30 years.
With investing, you can reach your goals quicker (hell, almost anything gets you to your goals quicker than 1.05%) and develop a skill that can stay with you for the rest of your life.
The difference between saving and investing is the monopoly on the idea of risk. It is not seen as risky at all to put money into a saving account. The truth is, your money is only insured up to $250,000. That’s definitely some risk. But it is always seen as risky to put money to work in investments. But like many things in financial markets, the monopoly on the idea of risk was created and fabricated by Wall Street as it perfectly aligns with their objective: to gather assets and charge fees.
Take control of your own money and future.