Today, saving and investing are often thought of as the same thing. In reality, they are two very different concepts.
Understanding the difference between saving and investing is crucial to your personal financial development. I will walk through what exactly saving and investing are and what vehicles can be used for each concept.
What is savings?
Money that you are designating for SAVING purposes must be put in the correct savings asset. There should be no risk of loss of your capital, and you should have full access to that capital, penalty free. Accounts where we can accomplish this generally pay low to moderate interest on the capital that is stored inside. Savings are meant to be liquid so that if you come across an opportunity, you can take advantage of that opportunity by deploying the capital in your savings. Often times the internal rate of return (IRR) is not nearly as important as the external rate of return (ERR). Below are examples of savings vehicles:
Savings Asset Examples
- Checking Account
- Savings Account
- Certificate of Deposit (CD)
- Whole Life Insurance
What about investing?
All money that you INVEST is at risk of loss. That doesn’t mean you will lose it all, but there is always the risk. This is why it is very important to invest in what you know (use your knowledge, not hope and speculation)! When you invest, you take your capital and purchase assets that you think will increase in value or provide positive cashflow. This increase in value or cashflow increases your overall wealth.
Below are examples of investment classes:
- Real Estate
- Qualified Retirement Plans (401k, IRA)
Qualified Retirement Plans.
Many people today consider QRPs as a form of savings, but they are not. You will hear individuals say that they are saving for retirement in their 401k plan. This is incorrect, because the most common products that are in 401k plans are mutual funds! Mutual funds are a type of investment product that consist of stocks and bonds, which one depends on the type of fund (target date funds hold both stocks and bonds). All of your money is at risk in a 401k! Ask someone who was planning on retiring in 2008 or 2009 about how saving for retirement in their 401k worked for them. In short, most of the “retirement savings accounts” you hear of are not actually savings accounts, but retirement investment accounts.
The only thing guaranteed in these accounts is that YOU WILL lose money when the market tanks AND YOU take all the risk (not the fund or plan manager).
Ask yourself these questions about your current QRP:
- What will your account be worth in 30 years?
- Taxes will be due at withdrawal, what will tax rates be when you access the money?
- Are you okay with the money being locked up unless you pay penalties?
All we are saying is be educated about what you are doing!
This blog isn’t meant to demonize the stock market or QRP’s. There are people who study and understand the markets. They can make good returns on their investment because they know what’s going on. We advocate that you invest in yourself first, then invest in what you know. So, if you want to invest some capital in books and seminars on trading, and then try your hand in the market, that makes sense. Just think twice before handing your money to a fund manager who is promising great returns, unless you understand what is going on.
One very important thing you need to be successful investing.
Often times, true savings vehicles get overlooked, because they don’t offer the CHANCE of receiving 10%, 20%, or 30% returns on your money. To chase these large returns, we need to have capital in the first place. Easily accessible, liquid capital. For example, if you think you can buy a house for $40,000, fix it up for another $10,000, and then flip it for $100,000, you’re going to need some capital for a down payment and repair costs. If you had to put 20% down and cover the repair bill upfront, you would want that money in a liquid savings asset, where you had access to your money penalty free. You wouldn’t want to store it in an investment asset where penalties, taxes, or loss of your capital is possible.
Who cares if you were only making 2% on the $18k in savings?
The IRR may have only been 2% but the ERR of having the money liquid and available was 100%!
The most ideal asset to save your capital in is a properly structured whole life insurance contract.
No other product on the market provides guarantees as strong as a whole life insurance contract. These contracts allow penalty free access to your capital with no risk of loss. They also guarantee that as long as you keep the contract in force, your cash values will go nowhere but up. This guaranteed growth comes to you tax free if your policy is properly structured and implemented. You also receive peace of mind knowing that your family will be taken care of in the event of your unexpected passing, because of the death benefit that comes with these contracts.
Book Your IBC Discovery Call today to learn how to save and accumulate your capital in the most ideal savings asset!