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The Save or Invest Dilemma
Usually people wonder what the difference is or even if there is a difference. Well, there’s a HUGE difference! As I discussed with you in the section entitled “The Arithmetic of Loss”, when you “invest” your money, your dollars are going into the financial markets.
These invested dollars can go up or down in value, and will do both over time: go up and down. You, of course, are hoping for many more years of “ups” and very few years of “downs” so that you end up with much more money than you “invested” when you want or need it, right?
That’s the whole idea behind investing in the financial markets. The other issue that recommends investing in the financial markets is the need to keep pace with or preferably out pace inflation regarding your dollars’ ability to keep its buying power.
The concept of “saving” is different though. Saving is when you place your money somewhere so that you know that your money will be there when you need it or want it. Savings don’t go up or down in value based on the market or on economic conditions.
Saving money is something you do when you absolutely, positively want the money to be there when you need it or want it. Is that true of investments? No, it’s not.
All you have to do to verify this point is to look at the value of your brokerage account statement (assuming you had one) in January of 2000 and compare it to the value of your account statement in November of 2002. There’s likely a big difference.
The average investor in that time period lost 45% of their account value! So, what does that really mean to you? Well, if you were invested in the market and you wanted your money at that time, it meant that your money was not there (at least not all of it) when you needed or wanted it. Those very attractive numbers in January of 2000 were considerably less attractive by November of 2002 because those numbers of January 2000 didn’t mean anything.
Why? Because unless you liquidate your holdings and convert those “unrealized gains” (those numbers on your account statement) to “realized gains”, which is cash, it’s not real money. Until it’s real money, you don’t get it and you can’t spend it. If you’re trying to accumulate money for retirement or some other purpose, do you invest or save? It’s not an easy choice, is it?
If you invest, you could hit the jackpot or you could possibly lose your shirt. The jackpot option sounds great. The losing your shirt option, of course, doesn’t sound so good.
There’s a way to save (with no losses) and yet have the peace of mind of knowing that when you want or need your money it’s going to be there. That it’s not unrealized gains, but real cash, and that you can get to it. Don’t worry, I’m going to tell you how.
More Free Advice from The Retirement Sage:
Early Retirement? Or Retire With More Money Than You Even Imagined?
The Save or Invest Dilemma
Your Three-Legged Financial Stool
The Arithmetic of Loss
Is the "Save or Invest" Dilemma causing concern over your future retirement income?
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