The Difference Between "Saving" and "Investing"

By admin
24 March 2015

This post was inspired by recent conversations with clients who came to me for financial advice. Most of them used ‘saving’ and ‘investing’ interchangeably.

After these conversations I found myself thinking about one of my favourite chapters in Alice in Wonderland, “A Mad Tea Party” and the part that always makes me laugh when I read it despite having read the book countless times.

The Hatter opened his eyes very wide on hearing this; but all he SAID was, `Why is a raven like a writing-desk?'

`Come, we shall have some fun now!' thought Alice. `I'm glad they've begun asking riddles.--I believe I can guess that,' she added aloud.

`Do you mean that you think you can find out the answer to it?' said the March Hare.

`Exactly so,' said Alice.

`Then you should say what you mean,' the March Hare went on.

`I do,' Alice hastily replied; `at least--at least I mean what I say--that's the same thing, you know.'

`Not the same thing a bit!' said the Hatter. `You might just as well say that "I see what I eat" is the same thing as "I eat what I see"!'

`You might just as well say,' added the March Hare, `that "I like what I get" is the same thing as "I get what I like"!'

`You might just as well say,' added the Dormouse, who seemed to be talking in his sleep, `that "I breathe when I sleep" is the same thing as "I sleep when I breathe"!'

As the clients used saving and investing interchangeably, I was tempted to be like the March Hare and tell the clients that “you should say what you mean” since there is a difference between the two concepts.

Though they are often used interchangeably, saving and investing are not synonymous. As a financial planner, despite clients using saving and investing as synonyms, I understood the clients’ needs and could help them, so no harm resulted from them saying “saving” when they meant “investing” and vice versa . However, for consumers managing their money on a DIY basis, financial behaviour stemming from this can significantly affect their financial goals.

In Pragmatic Capitalism: What Every Investor Needs to Know about Money and Finance, Cullen Roche explains the difference between saving and investing in simple terms.

Income can only be consumed, saved or invested. The most obvious use of income is consumption, the purchase of goods and services to be owned, used up or enjoyed. The second use is saving. Saving is setting money set aside for future requirements and the money must be available at the time when needed. The third use is investing. Investing is using money to buys assets with the expectation that they will rise in value so that a profit is achieved.

From these definitions, it is clear that there is an important distinction between “saving” and investing.” The primary goal of saving money is preservation rather than growth. However, when investing, the primary goal is growing the money being spent on investments. Financial behaviour such as “saving” money through buying shares or “investing” for a child’s education through keeping money in a bank account has had disastrous consequences for some consumers that I have come across. Here are a few financial goals that I have used to further clarify the differences between these two distinct but related concepts: saving and investing.

GoalSituation and time periodSaving or Investing?
Buying a new carYour old car is ready to give up the ghost – you need to raise the deposit to buy another car within a year.Saving
Put down a 10% deposit on a houseIn 3 years, you want to stop renting and buy your own houseSaving
Pay for your child’s university educationYour child is starting grade 1 so you have 12 years to achieve this goalInvesting
Going on an overseas holidayIn 2 years, you want to go on an overseas holiday for the first timeSaving
Retire comfortablyYou are 25 and would like to retire at 65  - 40 years in the futureInvesting