Investing is the superior form of saving. Here’s why.
Within the discourse of personal finance, there is a common sentiment that saving and investing are distinctively separate actions that people should avoid conflating. I do not necessarily disagree with this oft voiced advice, since not only does each vehicle of accumulating capital, and the utility they thus provide, differ, but investing inherently carries more risk than saving due to the speculative nature of equities. Ergo, while not necessary, it is certainly prudent to be knowledgeable of the different asset classes and mechanisms of investing to maximize loss mitigation. Saving, in comparison, is significantly more straightforward, and doesn’t involve such defensive measures.
With the above point being made, I however want to challenge this prevailing conventional wisdom and go against the grain. To me at least, investing and saving can not only be interchangeable, but I would also put forth that given the choice between the two, I would urge people to invest more than save.
To start, let us first focus on what saving entails. Saving is the habitual practice of putting away a variable amount of money during each pay cycle for later use. This is achieved by either manually pouring over finances to get an accurate assessment of how much you can set aside, or by utilizing saving apps like Acorns or Oportun which employ an algorithmic system tracking the purchases in your checking account to formulate a daily withdrawal rate automatically. The accrual of a nest egg is usually for impending expenses in the short-term — the purchase of a new car, paying for a vacation, attending an event — those sorts of things. However, it is also considered wise to have three to six months of salary saved in case of emergencies, so saving can also be a long-term hedge for an indeterminate future.
So, what makes saving so different than investing? The surface of investing is unquestionably different, as the latter involves the actual acquisition of something else in the form of equities, where the former, in its contemporary meaning, is merely a transfer of funds. Whether you buy stocks, ETFs, bonds, or commodities, investing also differs since it confers a title of ownership to the buyer, much like owning a car or home does. With that ownership comes shareholder voting rights and quarterly documents detailing the performance of your investment, as well as the outlook for the remaining calendar year. Investing is also intrinsically less accessible than saving — for instance, almost every financial service offers a savings account in addition to a checking account. In contrast, only certified brokerage institutions can facilitate transactions for stocks, bonds, and ETFs. This involves opening an entirely separate account with brokers like Fidelity, Vanguard, or Charles Schwab, to participate in investing.
But the obvious and biggest difference between saving and investing — and really, the primary source of enthusiasm in the latter — is directly tied to the speculative nature of equities. Holding your money in certain assets typically nets a greater annual return than what even a high yield savings account or certificate of deposit can earn, and can be attained either by capital appreciation, option trading, and/or collecting dividend distributions. Because of this, investing is seen by many as a way not only to create a steady stream of cash-flow, but also as one of the only accessible means by which the average individual can attain a level of wealth to better ensure financial security in the future.
If we stay fixated on the surface, it can be unclear to notice any parallels and connective tissue between the two personal finance methodologies. But suppose we look beyond the epidermis and reduce each to as simple a process as possible? The practice of saving, we can reductively deduce, is merely the stashing away of money not meant to be withdrawn until a later point in time. In this sense, investing when also reductively surmised, is a similar execution of putting away money to be used later. Despite the processes of each being different, they both effectively achieve the same goal in getting an individual accustomed to saving.
As alluded to earlier, saving and investing have distinct pros and cons. With saving, its two best qualities are liquidity and the approximate zero risk involved. In contrast, while investing carries more risk and lacks the immediate availability in cash reserves, it more than makes up for it with a higher theoretical return in comparison. However, what if I told you that the strengths of saving are also its biggest weakness, while the risks inherent of investing are overblown, and the low liquidity of investing is also a strength? The ease of access to your savings can serve as a detriment since there are no inherent safeguards to saving other than an individual’s willpower. Particularly for those with frivolous spending habits, the temptation is too strong to simply dip into those extra accounts operating with the logic that it will be replaced next pay period. This can a create a cyclical negative loop where saving is more difficult because those set aside funds are always being touched.
In contrast, when you transfer your money to an investment account, it typically takes 2–3 business days to settle in a money market fund, and conversely it takes the same amount of time to withdraw as well. If your money is held in shares of equities, that adds another 2–3 business days to withdraw money since those holdings will have to be liquidated first, and then the proceeds from the sale having to be settled in your account. Thus, in the worst-case scenario, a person looking to access any funds in their investing account will more than likely wait a week — a stark contrast to the less-than-a-minute liquidity a savings account provides.
But while this extended waiting period can at first be seen as a negative, the fact that your money is not as easily accessible is a great deterrent against reckless spending. You can’t just dip into this extra reserve on a whim, which not only lends to diligent saving habits, but is also conducive to practicing restraint in spending. This, in turn, makes investment contributions truer to the sense of “money you shouldn’t touch,” especially in relation to money being set aside in a pure savings account, because the mechanisms of a brokerage account actively discourage frequent withdrawals. And in the event you need to withdraw, it is likely that other options have been explored first, or it was planned weeks to months in advance.
The risk-to-reward component of investing works in the favor of preventing frequent withdrawals. Not being able to access your money so readily is one thing — knowing that touching it will limit its growth potential and reduce your total return is another thing entirely. The added psychological stressor of potentially undercutting your portfolio’s market performance, and limiting its prospect of reaching a high valuation, is reason enough for some people — yet certainly not all — to keep their money invested. However, the risk-to-reward quotient of investing, regardless of polarity, is alluring enough to extract fervor out of people who are otherwise levelheaded in every other aspect of their life. A contemporary attribution either heard or seen online refrains that investing is no different than “gambling” — and there are certainly aspects of investing that invite behavioral patterns resembling chronic gambling. Margin and option trading are exemplary mechanisms within investing more closely related to gambling, since it is essentially “betting” that the current price of a security will differ at some point weeks or even months later. Then you have the rampant buying of a security due to surrounding hype and FOMO, with nothing substantively backing the valuations other than a strong belief the price will continue to go up (never mind crypto — we have seen how disastrous this has turned out in traditional investing with the relatively recent WireCard and Nikola frauds). And even on the dividend-focused side, a security that seems attractive due to its high dividend yield could potentially be hemorrhaging money due to poor management, and will decrease or suspend dividends, depreciate your capital investment due to lagging financial metrics, or worse yet — cease operations altogether.
There is no sure thing when it comes to investing, since speculation is baked into its foundation. With that said however, there are avenues regarded as safe — or, disparagingly, “boring” — within investing that are low-risk and prove as strong shelters for your money. More importantly, they at least provide more growth than a pure savings account, which typically have APYs flirting below the inflation rate — which means your money is losing buying power over time. For instance, you could invest your money in the utility and raw materials sectors, both of which are essential to the functioning of modern society that companies who operate in either, provided they are run competently, rarely lose you money. Certain asset classes, such as closed-end funds (CEFs) and business development companies (BDCs), trade-off rising stock valuation in favor for higher, consistent dividend payouts, and their entire value is tied into being well-managed funds that emphasize loss mitigation, so those classes of assets have a vested incentive in providing stability. Lastly, if individual stock picking is too daunting, a person can just choose to invest in an exchange-traded fund (ETF), which are equivalent to a basket of stocks that may track specific sectors, a specific market index, and/or may provide a specific type of return, such as growth or dividends. Of the three, ETFs are the safest investment option for more risk-averse individuals, since any low-performing stakes are automatically removed from the fund and replaced with better performing ones. Additionally, ETFs give you the most exposure to multiple equities across different market segments, or sometimes just within a particular segment. This fragmentation provides a defensive buff against potential downturns in the market precisely because of the fund’s diversity, meaning your money tends to lose less value than individual stocks. Where one stock or sector may be waning, others can be experiencing a rise in valuation thus mitigating, canceling out, or proving your losses negligible to the total value of the fund.
In the end, the difference between saving and investing is marginal when examined closely. While they differ in how you go about setting aside capital, both practices of personal finance have the same goal for the individual in the accumulation of funds for later use. Pending on your time horizon, saving has its beneficial usage case due to its liquidity, and there is nothing precluding an individual from saving and investing simultaneously — in fact, I would encourage people to do both. However, if you do decide to pick one over the other or want an answer to which should be of higher priority, opt to pour more of your resources into investing over saving. Investing is saving after all, and the more you prioritize it now, the more financially secure you will be in the future.
