Cash Is King: Part 1 - Saving vs. Investing
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They say that beauty is in the eye of the beholder. Likewise, savings is magical, beautiful, powerful, but only for the person with the eyes to see its worth.
When I have savings – cash in my control that I can use – I’m more relaxed and confident. I’m infinitely more creative when I’m safe and at ease. I’m able to direct all my energy to producing, taking action to create the next thing instead of protecting and hiding out in fear of losing everything. If it doesn’t work out, I’m not going to crash and burn. It’s like the solid foundation beneath my feet that keeps me progressing instead of slipping backward.
When you save money, you keep it. You’re not seeking high returns. You don’t put it at risk. You can save money under the mattress, in a coffee can buried in the backyard, in the bank. No matter where you save, unless you spend it or it gets stolen, you aren’t losing your money. Saved money is safe money that is guaranteed to never go down in value.
Contrast this with investing. When you invest, you’re looking for returns. You take on risk with the hope to get a return. With the risk, you get the potential for growth of your money, but also the potential for loss. Invested money has a risk of loss, and can go down in value.
Enter the 1980s hype of the 401(k), where you could “save” for retirement and get returns too. You could also “save taxes”, but we’ll leave the tax issue completely off the table until another episode. If you put aside just $200/month for 45 years, at an expected 8% return, you could turn your account into over a million dollars.
Problem is, people came to learn that there were times when they put their money in, did all of the right things, but the market still mercilessly washed away their life savings as indiscriminately as the waves of the ocean wash away sandcastles built on the shoreline.
If you put your money at risk, it’s not saving, it’s investing. You can never apply compound interest principles to an investment because you’ll never see consistent, predictable returns.
And hoping to be lucky and not lose will only cause your blood pressure to rise over things that you can’t control, like when the bottom dropped out and the S&P 500 lost 57%, more than half of its value, in the 2 years from 2007 to 2009.
The rule of thumb is this: if it can lose value, it’s not savings. This disqualifies anything in the stock market, whether its mutual funds inside a 401(k), 403(b), IRA, or Roth IRA, and even equity in your home.
Years and years of putting money away where you have the potential for loss can never guarantee you a certain future, and any expectation of that actually working out in your favor is built on false hope and absolving of responsibility.
So while most people are busy believing the marketing and following the rules, investing in their retirement plans automatically with payroll deductions, and only saving if there happens to be enough left over, the ultra-wealthy who’ve transcended the system are doing just the opposite.
The successful prioritize saving. So much so, that they save automatically. Why? Because they have boring, predictable money that they can count on to be there when they are ready to make a deliberate investing decision in the right opportunity, such as buying assets at a deep discount during a time of crisis. Instead of investing on autopilot and saving when they can, they are saving automatically and investing intentionally.
Savings is like the safety net beneath the acrobats at the circus. With the buffer between the tightropes and the floor, the artists can confidently demonstrate the skill they’ve mastered. Without the safety net, they’d never scale the heights that they do.
It’s time to revive your savings, and reawaken to the power it has in allowing you to live a truly free life, not just in the future, but right now, where it counts. Because living free to be your most productive, creative, highest potential version of yourself today is the only way to set up for an amazing tomorrow.
To start prioritizing your savings, here’s what you can do today:
1) Write down any accounts where you are holding money
2) Go down the list and ask yourself these questions:
A) Does this account have the potential to go down in value? If so, it’s an investment.
B) Is it liquid and accessible?
IF you are weighted towards money at risk, turn the tables – set your savings to auto-deposit, every paycheck, and be ok staying in cash until not only a good opportunity but precisely the right opportunity, surfaces.