Saving and Investing Compared

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We live in perilous financial times.  Over the past few years thousands of people have learned valuable lessons – many of which the hard way.  One of those lessons is the difference between saving and investing.  By clearly understanding the difference between saving and investing we can avoid the disaster that left too many people wondering where their retirement went.  Typically when you ask someone how they are saving for retirement they will say they are putting money away in a 401(k), IRA or other qualified plan.  Then you ask them how they’re investing for their future and they’ll mention diversified stock portfolios, mutual funds and possibly some real estate.

It’s important to point out that the two answers above are essentially the same.  Too many people aren’t fully aware that when they contribute money to a 401(k) or other qualified plan they are investing.  We have been tricking ourselves for years by calling it saving.  to prove this flaw lets look at the definition of an investment: to expend money with the expectation of achieving a profit.  The key word in this definition is ‘expectation.’  We have become too tolerant with our expectations – we no longer take into consideration the fact that investing money involves severe risk (just ask those that were looking to retire in 2008 but couldn’t because they’re retirement funds were cut in half).

Actually saving money can be compared with putting money under your mattress.  It’s there and it always will be there regardless of what the unpredictable markets decide to do.  Now, I’m not suggesting that everyone turn their pillows into their new retirement plans, I’m just hoping to shed some light on some of the false practices we’ve been told to follow and which have been failing miserably in recent years.  Every single person in America would be better off in the long run if they asked themselves ‘am I saving  for retirement or investing?’

Often times when this overlooked difference is pointed out, the question arises ‘if I’m not actually saving money in a qualified plan where can I efficiently save for retirement.’  In late 2009 Time Magazine ran a cover story called Time to Retire Your 401(k) – the alternative they proposed was a life insurance plan.  It may sound crazy but over the past decade more and more people are looking toward permanent life insurance for steady, consistent, and risk free growth.  On top of the fact that qualified plans are subject to market gyrations you also have to take into account that when you are in your retirement years and begin taking distributions there is no telling what your tax rate will be.  One way to win with a tax-deferred retirement plans is to be in a lower tax bracket when you retire than you’re contributing.  Based on the fact that our country is trillions of dollars in debt it’s hard to imagine taxes going anywhere but up.

Hopefully we can learn from the past and use vehicles that help us save for retirement instead of invest or gamble for it.

Nick Drzayich is an advisor at Eagle Capital Management where unique concepts such as Infinite Banking are taught.

Betterment is one of my two favorite ways to earn interest on my savings! They have an awesome program for the Average Joe to save and invest simply and effectively. There are no minimum balance requirements and no transaction fees. Read my Betterment Review or open an account to get started earning now.

1 Dr. Timothy Lawler

Good points here. I agree that you need to have your money do a little something for you, rather than just even sitting in a savings account. Try to do a ladder of CDs or something similar to get a little life out of your money. Like the site. Keep up the good posts.

2 Nick

Thanks Tim! As i mentioned in the article more and more people are looking toward whole life insurance policies from mutually owned companies. With guaranteed returns and track records over 100 years old they provide an extremely safe environment for consistent growth.

3 Jason L

I second Matt’s comment about Betterment… highly recommend that everyone checks it out.

4 Kristen

Matt what would you recommend for a recent graduate that can only get a part time hourly job?

5 Matt Jabs

Hi Kristin,
Are you asking about recommendations for work/income, or for investing/saving?

6 Kristen

For investing/saving

7 Matt Jabs

If you’re looking for a tax-sheltered plan (e.g., Traditional IRA) and have at least $3,000 then I recommend opening an account with Vanguard and investing it in their targeted retirement fund that fits your retirement age. For me, since I’m 35, I would choose their Targeted 2040.

If you’re looking for an after-tax solution I recommend investing with Betterment. They are an awesome solution for the beginning investor that wants a managed, diversified portfolio… but has no idea how to go about doing it themselves. There are no minimums to invest and Betterment does all the work for you.

8 Joe

The article mentions Infinite Banking. Which, in the long run, is going to be a much better strategy than any IRA 401k etc. You don’t want to get into any government sponsored program, especially with the market the way it has been. The more baby boomers retire, the more money comes out of the market, more supply means lower prices, and that’s bad for you if your money is in the market.

9 Sam

Nice post.. there is some good info in here! I have money in both an IRA and savings account. My money in savings is through a credit union that I have been going to for years… I am happy with their service so would there be any advantage to switching to a bank? I don’t want to but I feel like most people use regular banks and I’m not sure why. Thanks!

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