Just the other day, I was sitting at my favorite local library (if you happen to go there at the right time, you’ll probably find me sitting at a table with a notebook open in front of me with several personal finance, career, time management, and self-improvement books piled around me). I was browsing through a personal finance book – I’m not sure which one, but I’m pretty sure it was focused on retirement – and something caught my eye.
Within two paragraphs, the writer seemed to be using the words saving and investing completely interchangeably. I read the paragraphs a few times and I simply couldn’t find any difference in how the author was using the two words.
At that moment, it didn’t set off too much thought in my head. I kept leafing through books and jotting down notes and so on. Eventually, I piled up my books to be returned to the shelf, packed up my notebook, and strolled out.
A few hours later, the words saving and investing popped up again in my head. The more I thought about the words, the more I realized why people might use them in place of each other, but they actually have rather different meanings and connotations.
So, let’s look at saving and investing.
Wikipedia defines saving as income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. In other words, when you choose to put money aside for the future, that counts as saving.
At the same time, Wikipedia defines investing as time, energy, or matter spent in the hope of future benefits. Whenever you put something aside for the future in the hopes that doing so will provide additional benefit to you, then you’re investing.
In other words, investing is just one kind of saving. Whenever you put something aside, regardless of your hopes for the future, you’re saving. When you put something aside with the hopes that it will somehow provide a bonus to you after you set it aside, you’re investing.
Here’s a very clear example. When you stuff $1 and $5 bills into a coffee can under the sink, you’re just saving. You are not investing because you aren’t expecting any growth or extra return on that money.
On the other hand, when you put those $1 and $5 bills into your savings account once a week, you are investing. You’re expecting a return on that money – the interest the bank pays you. Yet, you’re also saving that money. You’re choosing to not spend that money and put it aside for later, which is what saving is all about.
So, most of the time when people talk about personal finance, they’re using “saving” and “investing” as meaning practically the same thing. Even when you’re building an emergency fund, it’s kind of assumed that you’re putting the money in a savings account, which means you’re expecting at least a little return on your money. It is just assumed that part of your goal is to get a return on your money when you’re not spending it, so “saving” and “investing” mean practically the same thing.
However, they require two very different things from people.
Saving requires you to have the self-control to choose not to spend your money and to have some left over at the end of the month. The act of saving requires psychology. It requires you to modify your behavior in some fashion because you’re making the choice to save, not to spend.
Investing, on the other hand, requires you to look at the returns you’re going to get in comparison to the risk you’re going to take on. That has a little to do with psychology (as in how much risk you can stomach), but it also has a lot to do with math.
My belief is that the real challenge of personal finance for most people is saving, not investing. It’s the psychological choice to simply not spend money and put it aside for the future. Without saving, there is no investing; you have no money with which to invest.
If you move past that and assume that people are already saving, then investing becomes a more important topic. You’re now accumulating money, so you’re going to want to do something smart, right? However, that decision really doesn’t mean anything if you’re not saving.
It is far more important to choose to save than to worry about how you’re investing. Once you master that choice, that is the point when investing choices start to become important.
Many personal finance publications focus on investing and don’t really consider saving. Why? It’s much easier to talk about investing because the numbers and options are constantly changing.
Saving, on the other hand, deals much more with psychology and frugality. Those things are valuable, but it’s hard to write attention-grabbing headlines about saving.
What’s the take-home message? Master saving before you worry about investing. Put your money in a coffee can under the sink or in a savings account until you’re getting used to what you need to do to save consistently. Once you’re doing that, then investing becomes an important matter because you need to start asking what you’re going to do with those savings.