Buddhist Catholic Contemplative Evangelical General Christian Hindu Jewish Latter-day Saint Muslim New Visions Progressive Christian

Beliefs

Topics

Columnists

Resource Library

Research Tools

Video

Podcasts

Thought Readers

Faith In Media Tracker

Newsletters

Ad-Free & Subscriber Log-In Subscription Support

Follow Patheos

Faith and Finance

Home
Evangelical
Business, Finance and Religion
The Difference Between Saving and Investing

The Difference Between Saving and Investing

Last updated on: June 5, 2018 at 2:25 pm by Bob Lotich

The Difference Between Saving and Investing 2018-06-05T14:25:51-05:00 Bob Lotich

LOGO Patheos Explore the world's faith through different perspectives on religion and spirituality! Patheos has the views of the prevalent religions and spiritualities of the world.

Most of us innately know that saving and investing are not the same, but do we understand the difference? Because clarity in this distinction can greatly impact one’s financial well being, realizing these difference is vital. The key is in two words: risk and liquidity.

Savings are low risk funds that must be liquid (available) when you need them. The purpose of saving money is so you can have it for a specific purpose within a short time frame.

Investments, on the other hand, are for wealth building, and will not be needed for many years. Yes, investments do involve greater risk, but, investments also yield much greater returns when left alone long enough to ride out the turbulence of the stock market.

Examples of savings

Emergency Fund

When an emergency happens, the money is needed immediately. The emergency fund, therefore, should be in a very boring account, such as a Savings Account or Money Market Account. One could also consider an online high interest account, as long as the funds are easily accessible. Its purpose is not to make a bunch of money; it is there for emergencies.

Car Fund

You DO save up and pay cash for your cars, don’t you? This money should be saved, not invested. Why? Because you don’t want to take the risk of a market plunge just when you are ready to buy.

Anything else you will need to pay cash for

What are you saving for (notice the word “saving”)? A home improvement (or repair), a riding lawn mower or a new computer are all examples of saving: you will need a set amount on a set date.

College Funding (sort of)

Should college funding be an investment or saving? It depends on how soon Junior is going to be entering college. If college is 18 years away, the money should be invested (make sure you use an ESA or 529 plan to get all of the tax breaks). But what if college starts four years from now? You don’t want the risk of your investments tanking just when that first tuition payment comes due. The choice is yours, but I think you should be moving those funds to a less risky vehicle (maybe even a savings account) as the time of need approaches.

Examples of investments

Retirement

Yes, retirement is the big one and retirement funds should definitely be considered investments. Such funds should be rebalanced annually or even bi-annually, but you basically leave them alone and don’t worry about checking the stock returns by month. However, like college funding, the retirement nest egg should be made safer as the time of need draws closer.

Starting a business

If you have a long range plan to start up a business (say 10 to 20 years from now), you should be investing to achieve the nest egg needed.

Breaking it down

The difference between investing and savings is really quite simple. If you are going to need the money in the near future, save it. If you aren’t going to touch the money for a longer time frame, invest it. The trick is defining this time frame. Financial guru Dave Ramsey uses five years as his criteria. His rationale is that the stock market has historically made money in 93% of the five year rolling time frames and in 100% of the rolling ten year periods. Most of us are aware that the recent recession changed those percentages, and I heard Dave Ramsey recently say that the stock market has made money in 100% of all rolling fifteen (no longer ten) year periods. However, as far as I know, Dave still uses the five year criteria to distinguish saving from investing.

What do I think about the five year guideline?

I am OK with it. If I know I will need to tap the money in five years or less, I consider it savings. Our emergency fund and car fund are both in Money Market Savings Accounts. On the other hand, if I am not planning to touch the money for longer than five years, I invest it. Our traditional and Roth IRA’s are examples of our investments.

One could also have a hybrid investment fund. An example of this would be flipping a house. This is clearly an investment, with money tied up in the house. However, when the house sells, keep this money quite liquid and available (think savings account) so you can be poised to buy another flip house. I label this hybrid, because you would at that time have an investment that you’re treating like savings.

How about you? Do you have a clear guideline to distinguish saving from investing? What is that guideline?

Previous Post

April 24, 2018

Tax Refund? How You Should Use It and Why You Should Lose It!

Next Post

May 2, 2018 Do you have the spiritual gift of giving?

Browse Our Archives

Select a Category ALL Bible and Money Biblical Perspective Book Reviews Budgeting Business Corner Churches and Pastors Debt Encouraging Scriptures Entrepreneurship Faith and Economics Family and Money General Personal Finance Giving Inspirational Quotes Investing Making Money Other Personal Finance Retirement Reviews Round Up Saving Self-Improvement Taxes Uncategorized

Select a Month January 2019 November 2018 October 2018 September 2018 August 2018 July 2018 June 2018 May 2018 April 2018 November 2016 October 2016 May 2016 March 2016 February 2016 January 2016 January 2015 November 2014 October 2014 August 2014 April 2014 March 2014 January 2014 December 2013 November 2013 October 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 December 2010 November 2010 October 2010 September 2010

TAKE THE

Religious Wisdom Quiz

What was the result of Jesus meeting the Gerasene demoniac?

Select your answer to see how you score.

Bread multiplied A man healed of leprosy A storm calmed Demons cast into pigs