Saving versus investing

Saving is deferred consumption. There are all sorts of good reasons to save – a new car, an annual holiday, a house deposit. Almost everyone has savings with these and other goals in mind.

The enemy of deferred consumption is inflation. Over the short term, it may not be noticeable – if you are saving for a holiday in June, you pretty much have a price in mind now and you can channel appropriate amounts into savings.

Over the medium term, it becomes more tricky to plan savings. The most obvious is a house deposit. You may start out with a target deposit to accumulate over, say, a three year period. But then house prices and other factors can conspire to make those savings inadequate when the time comes and compels you to continue saving for longer.

Savings accounts are a good way to save. They may pay some interest, which offsets the effect of inflation. They are easy to pay into and when the time to consume arrives, the money can be withdrawn. I use savings accounts to hold four years of lifestyle spend, giving predictability and manageability.

Over the long term though, saving is almost impossible. This is because you would have to accumulate in your savings account the total amount you need to spend until you die, plus extra to cater for inflation.

Although you hear casual phrases like “saving for retirement”, saving is not the right tool for the job. Thinking of retirement spend in terms of deferred consumption is not helpful (even though it technically is).

Investing

For the long term, we need investing. Investing is the accumulation of assets which generate future cash flows. Examples are companies, property, farmland, publishing rights and others. Those future cash flows can be valued today, which result in an asset price.

There are many different asset classes, with pros and cons. My preference and experience is publicly traded companies, which also goes by the name of stocks, shares and equities.

There are also different investing strategies called active and passive, and different styles which will be the subject of a future post.

Long term investing results in a portfolio you can generate cash from to meet your lifestyle needs far into the future, and take into account the ravaging effect of inflation.

A note on Trading

It is also possible to accumulate assets which do not generate future cash flows. Examples are gold, cars, wine, art, bitcoin, watches and many, many more. This is called trading, not investing. Trading is where you hope to find a buyer in the future who will pay more for that asset than you did.

Unlike investments, trade-able assets do not have future cash flows attached. Indeed, they may also incur holding costs while owned. Value can only be realised from the asset after sale.

You won’t find any thoughts on trading in this blog. However, the internet is awash with trading experts if you want to explore that option further.

Read more on this topic . . .


Disclaimer

I am not your financial adviser.

The information in this post relates to my financial journey. It may or may not be relevant to your own. You need to make your own decisions on your own financial strategy.

Do not buy or sell anything based solely on what you read.