The age old question that will never go away: saving vs investing, which is better? The answer is different for whichever stage of the journey you are in. In the beginning stages, saving makes more of an impact and is “better”. In the later stages, investing is the “better” choice.
The ultimate goal is for your passive income to pay you when you don’t even work. Passive income that covers all of your living expenses and then some. Then that is when you reached “financial independence”. That’s why investing is better in the later years. Savings don’t give you passive income, investing does.
However, investing just simply does not make that much of an impact in the earlier years. A 100% return, which is monstrous, on $1,000 is only $1,000. That probably pays for just one month’s worth of rent. That’s it. No surplus left to boot, either. Therefore, it’s more important to beef up your savings balance in order to make it impactful.
The problems with other “saving vs investing?” articles out there is that they were made by people who haven’t experienced this themselves. I personally experienced it myself because I went from having $40,000 straight out of college to $400,000 today. These days, my investing returns at times outpace my savings amounts.
It’ll only be a matter of time before my investing returns outpace my entire salary. My investment returns in 2021 were very close to my gross salary. However, I also understand the monstrous 2021 returns are a total and complete anomaly. It matters what my investments return in a normal environment.
I have a feeling though, it will be soon until I actually get there. Certainly in the next couple of years.
Saving vs Investing: What’s the Difference?
There is a BIG difference between saving vs investing. Saving is when you gradually save money from your various income sources typically in a bank account. It could be for a particular goal such as saving up for a house, a car, college, emergency fund, or anything else.
Investing is when you risk funds into a vehicle that has the potential to make you more money in the future. Things such as stocks, bonds, cryptocurrencies, real estate, and the like. These are what’s called assets that make you money over the long term.
Both are crucial and important things that you need in your personal finance journey. You can’t have one without the other because it doesn’t make sense otherwise. It’s a symbiotic relationship and each depend on each other for survival. However, one is more important than the other, which is dependent on where you are in your journey.
These days, my investments are slowly outpacing my savings. I save approximately $2,500 per paycheck and invest it into the stock market. Without fail. It’s partially done automatically for me through a 401(k). Some days, my 401(k) investments completely outpace my entire biweekly paycheck. That makes me very happy.
In order to get there though, the crucial element between the two you need is time. Without time to beef up your savings and your investment balances, you have nothing. I remember when my 401(k) investment accounts swelled up to $10,000. A 1% return meant I made $100 for the entire day without lifting a finger!
You will be amazed at the joy investing gives you over time. It’s when you get paid for literally doing nothing productive. What’s more important is that you can get there.
Saving vs Investing: Pros of Saving
Zero risk. If you save $100, you will always have $100. Now, will that have the exact same purchasing power across time? Absolutely not. There’s a little thing called inflation that makes it impossible. Using the inflation calculator, did you know you need almost $9M in 2021 to equal the same $1M purchasing power as 1970?
Something will always come up/liquidity. This is why you have an emergency fund. Your car breaks down, your sink breaks, and life just generally happens. When you save, you will have the short term liquidity in order to spend money on things that may pop up. There’s a reason why I have $10,000 in an emergency fund. For anything that may pop up, and things always seem to pop up.
It gives you security. When you know you have cash on hand without having to wait for the market to open or for brokerages to transfer your funds, it gives you security. Someone with a million dollars in cash will always sleep at night soundly versus someone with a million dollars in the stock market.
Automation is possible. With the invention of technology, you can easily automate savings accounts. Things such as direct deposit are wonderful inventions that allow you to transfer any amount of money from your paycheck to savings accounts. You can save emotionlessly.
Bank relationship pricing. Once the banks know that you have a lot of money in the bank, they give you special treatment just for choosing them. Depending on how much you have, they may treat you like royalty and give you preferential treatment over another customer. The interest rates are generally lower for wealthier customers than poor ones.
Saving vs Investing: Cons of Saving
Lose money to inflation. Whether we like it or not, inflation will always happen as long as population is increasing. And population is almost always increasing. When all you do is save your money, you will be able to spend less on things year over year, not more.
Your money doesn’t work for you. Money is the best employee you can ever have in your life. It doesn’t complain nor asks you for vacations. In a savings account, your money doesn’t make more money for you, it just sits there doing nothing. You want your employees to work hard for you, not do nothing.
Not knowing what to do with the money. The biggest problem Warren Buffett has is that he has about $150B in cash. He has so much money that he doesn’t know what to do with it. That’s a real problem if you’ve actually been in the position. It causes you to make subpar decisions and actually lose money as a result.
ATM fees. The banks are literally and legally allowed to charge you money to access your own money. “Out of Network” fees is what they call it. This is one of the ways why it’s more expensive to be poor. If you want to access your savings money, you may just have to pay a fee to access it.
Not having joy in your life by over-saving. The frugality disease is when you save at the detriment of your happiness, health, and quality of life. It’s when you choose to wear tattered shoes even though it hurts you to walk in them because you don’t want to buy new ones. Saving too much can lead to this potentially fatal disease.
Saving vs Investing: Pros of Investing
Now, in the saving vs investing comparison, we get to the fun topic of investing!
Your money works for you. When you invest your money, your money works hard to bring more of its friends onto you. That’s how your net worth and your empire grows. Even if you don’t lift a finger or do anything meaningful for society. That’s how great investing can be. You can be lazy and still get paid for it.
Unlimited potential. When it comes to active income, you are limited by the amount of time that you can sell. There’s only a limited amount of time that you can sell on Earth. In investing, it’s limitless. You are only limited by your ability to acquire more money. Otherwise, you can have endless amounts of it.
Beats inflation. Investing returns have beaten inflation over the long term since the stock market was created. There are investments that do lose money but broad market investing has generally beaten inflation since the stock market’s creation. Your money’s purchasing power increases as a result.
Lessen financial dependence. There’s nothing more toxic than financial dependence. It’s when you are so dependent on your company for survival that you are willing to do anything for them. Investing lowers that financial dependence and gives you the keys to unlock the door that is financial independence.
Tax advantages. In the labor vs capital debate, the tax code favors capital any day of the week. Long term capital gains taxes are almost half the highest tax bracket of labor income, or active income. Why work harder just to get taxed more? That doesn’t make any sense. Work less to get taxed less, that makes a ton of sense.
Saving vs Investing: Cons of Investing
There’s potential to lose money. Unfortunately, risk free investments do not yield very high returns. Therefore, in order to get significant returns, you need to invest in riskier investment vehicles than treasury bonds with a chance of losing money. I lost almost $100,000 during the pandemic, it was brutal. The risk is there.
No spending on material things. Every dollar you spend in the stock market means one dollar less to spend on material things. Currently, I am very cash poor and do not spend a lot on luxury things because I spend so much of it in the stock market. There are days when I wish I could spend money on another computer.
Takes a long time. It takes a LONG time to realize your investments to where you are satisfied. It took me five years before I felt like my investments are giving me enough income to feel less dependent on my company. Five years is an eternity to some people. Investments, in general, take a long time to come to fruition.
Less liquidity. If your investments are in real estate and/or in private businesses, then there is less liquidity. You can’t easily buy and sell the investments to turn into cash. You may need the cash for your short-term needs and so accurate planning becomes more crucial.
Causes emotional instability. My college friend summed it up perfectly. “The day I started investing, I couldn’t sleep well because I was scared at what my money was going to do”. We have an emotional connection to money. When you risk any amount of it, it causes you emotional instability if you are just starting out.
Saving vs Investing: Do Both if You Can
The best way to win the saving vs investing debate is to win both ways. Even though my income increased by two fold since my first job out of college, I didn’t change my habits. I’m still continuing to save and invest because 1. it’s a habit and 2. I like doing it. I also know that if I do this for a few more years, I am set up for life.
Sacrificing 5 – 7 years of my life to be set up for the next 60 years sounded like a great deal to me and it still does. Trust me when I say that it’s been all worth it in the end. The first few years, you won’t even notice it because it’s a new goal you’re striving towards anyway.
Once you get over that hump is when you’re going to emotionlessly and like clockwork save and invest like there’s no tomorrow. It’s in your best financial interest and it’s advantageous for you to save and invest as soon as you possibly can. Missing a few years won’t matter, missing 5 – 10 years start to matter.
Not just little, but matter in serious and monumental ways. That’s when you look back and thank your younger self for getting you to where you are today. I’m not quite there yet, there’s a couple more years of saving and investing ahead of me. However, I know it’s all worth it.
When you feel like giving up is when you remember that you didn’t come this far to only come this far. Keep going. The game is just about to get good. Slow down if you need to but still move forward. Instead of asking “saving vs investing” and make it complicated, just save and invest and win both ways.
Investing is Better in the Long Term
In saving vs investing, investing doesn’t really matter in the short term. The first 2.- 4 years is not that significant. It’s when years 5 and beyond that investing becomes significant for you to notice the changes. It’s what gives you the ability to passively generate income instead of actively generating income.
In the long run, you can even ignore saving if you really wanted to. There are people out there who solely live off investment income and doesn’t lift a finger in their day jobs. That’s because investing took over their income sources and they have more than enough to pay for their living costs.
Investing is better in the long term as a result. The biggest milestone in investing is $500,000. Once you hit $500,000, that’s when you can live off $20,000 a year, on average over the long term. $20,000 is enough to live on for many parts of the United States, and certainly in most parts of the world.
You just have to get to half a million dollars. That’s the biggest milestone that you will be proud of and that’s the biggest milestone to keep in mind of. Once you get there is when everything turbo charges going forward. It’s when you are going to grow faster than you can manage the growth.
I’m not quite there yet but I have a good feeling that I’ll get there in 2022. This is a big goal that I set out for myself because no one in my family ever reached the half a million dollar mark in their 20’s. Will I get there? Keep reading this blog to find out as I am transparent with the numbers!
