What’s the difference between saving and investing?
Had you asked me that question in 2005-2006, I would have answered that over $4 million of my family’s savings was an “investment. I had not yet learned the difference.
By the end of 2007, that difference cost me my entire life’s savings. I lost my homes, cars, boats, social status. I collapsed mentally and emotionally. Eventually, it almost cost me my marriage, family—even my life.
This happened because I invested; I did not save. Worse than that, I invested what I thought was my savings because I thought that investing was a higher form of savings. Investing is not a higher form of savings—it is a completely different strategy altogether.
Most people would agree with me that investing is not saving. Then they will continue to “save” for the retirement in a 401(k) or IRA, or “save” for their child’s college tuition in a Coverdell or 529 plan.
So which are you doing with your money: saving or investing? And why is the distinction so critical?
If you don’t understand the difference, and which vehicles to use for both, you will jeopardize your wealth, just as I did. So to keep your wealth safe and growing strong, learn the distinctions below.
For more details on this topic, get your free hardcover copy of What Would the Rockefellers Do?.
I co-authored this bestselling book with Garrett Gunderson. It details the financial system used by the ultra-wealthy to protect, grow, and pass on wealth.
Investing Vs. Savings
Saving and investing are treated as synonyms by typical banks and financial planners. However, they are distinctly different wealth-building strategies. On the one hand, saving is primarily used to “preserve” capital. On the other hand, the purpose of investing is to “grow” your capital.
Saving
Think back to when you were saving for your first car. Did you give your money to a friend so he could start a new business? No, you put it in a safe place. Likely a box under the bed, in a sock drawer, or maybe into a bank. It was somewhere you wouldn’t lose it and somewhere that you could get to it whenever you wanted.
Money you save is money that you earmark for a certain future purpose. There is no speculation; there is no room to gamble with this money.
Investments will always be subject to loss. Even inside of our own business or career, there could always be some unforeseen event. This is why your savings must go into the safest possible financial vehicles.
You want to be able to access your cash when you want it, without penalties, fines, or fees (liquidity). You want this cash to be as close to zero risk as possible and to be guaranteed by contract (also protected from lawsuits, claims, and garnishments).
Remember, savings is purely for preservation. The savings element is where you put cash for any short, medium, or long-term expenses that you believe you absolutely must take care of. This can include things like retirement, paying for a child’s education, and cash reserves for your business.
Investing
Investing is extra money you set aside to simply build wealth. By “extra,” I mean money that is left after you are done saving and spending.
You do not invest your savings—this is an oxymoron. Doing so would immediately convert your “savings” to an “investment.” The same money cannot exist in both places. It’s either earmarked for preservation or for growth.
This isn’t to say that savings can’t grow over time. But that growth demands different strategies from investing. Saving must be guaranteed, protected, and liquid. Investing allows for some risk, but ONLY in an area where you have knowledge, experience, and expertise.
Gambling
I define gambling as putting money into anything where you have little or no knowledge, experience, expertise, or control, and you have a “get-something-for-nothing” mindset.
I recently had a conversation with a client, Tom. In the midst of the global Covid-19 pandemic, oil prices plummeted, and it became very tempting for Tom to buy stock in a big oil fund. The time seemed right—after all, oil was so low that it must climb back quickly.
Tom pulled together $20,000 and purchased the stocks. Within two days, the stocks fell an additional 20%—in two days, he had lost over $4,000! Not only that, but it was now the weekend, and he could do nothing but let it eat at him while he waited to see what Monday would bring.
Tom explained that he had only slept two hours and didn’t think he’d be sleeping much over the following couple of days. He admitted, “It was a complete gamble.”
Regardless of what happens on Monday, this is the cycle for those who invest outside of their control. Sleepless nights with the thoughts “Will I lose it?” or “I just lost it!”
Invest Where You Have the Most Knowledge and Control
The three points of the Vault AIS triangle are Asset, Investment, and Strategy. These three points tell us where and how to invest:
You are Your #1 ASSET
Your #1 asset is not your business or any investment It is you. That is the first asset we focus on protecting and growing.
Your #1 INVESTMENT is Your Business/Career
What has put the most amount of money in your pocket up until now? Your career and or business. The area where you have the most knowledge, experience, expertise and control. And it’s the area that will continue to put the most amount of money in your pocket.
If you take any risk, take it here and nowhere else.
Your #1 STRATEGY is Guaranteed, Protected, and Liquid (GPL)
Your #1 financial strategy is to store your extra cash in places that are guaranteed, protected, and liquid. Having guarantees on your money protects your mindset and your ability to continue to produce at the highest level in your area of expertise.
This is like locking your money in a vault. You still have access to it to make other investments. But the certainty and control it gives you is the foundation of your wealth.
As an investor, there are many risky things you could inject your investment dollars into. You could use typical vehicles like stocks, bonds, 401(k), a private business, crypto, etc. But unless you have knowledge in these areas, you’d be asking for many sleepless nights spent with anxiety about your “investments.”
I suggest you take a different approach. When it comes time to take some risk with the money you have set aside for investing, use that cash to take a risk somewhere you can control: in your #1 Investment—your own business or career. Invest in people, processes, and systems.
Invest in your #1 Asset: yourself. Increase your Human Life Value through education and training.
What could have been the outcome for my client Tom had he invested his $20,000 into growing himself as his own #1 Asset? He could have purchased training on marketing, systems, or sales. With that new knowledge, he could have continued to advance his #1 Investment, his business. He could have found new or creative ways to grow during the pandemic and into the future. He could buy new tools and machinery that could make his business more efficient and profitable.
Sure, there is still risk here, but Tom would control that risk. And since Tom’s business has always put the most cash into his pockets, this “investment” has a much more valuable return than any speculation could ever bring. In addition, Tom would sleep and wake up filled with fire to create.
Do you see the difference? When it’s time to invest, take the risk somewhere that you have knowledge, expertise, or experience. DO NOT GAMBLE!
Grow Your Wealth Safely
Think of spending, investing, and saving as strategies that work together to produce wealth. I suggest you execute these strategies in the following order:
- Pay yourself first. This is your savings. Remember, this is cash you want access to when you want it because you want it! Savings are used for specific short, medium, and long term. Such as buying cars, homes, children’s college tuition, retirement, things you feel you absolutely must take care of! Take it out first, or expenses will ravish the account.
- Next, you will want to take care of expenses. Spend to cover current personal, family, and business “needs” as well as living expenses such as food, shelter, and entertainment.
- Your business or career has and always will bring you the most satisfaction and financial growth. Therefore, always take a portion of your income and reinvest in yourself and your business. Set money aside to invest in marketing, sales, systems, and/or infrastructure. Examine everything you do with this money. Remember, it is earmarked for growth, not speculation-based risk.
This is significant because many who read this have never distinguished between saving and investing. Many have their retirement in a 401(k) or their child’s college fund in a Coverdell or 529 whose models are based on stocks.
As we discussed earlier, stocks are NOT a saving vehicle; they are much too risky and volatile for saving. If, by chance, you have knowledge, expertise, and experience in stocks, then invest in stocks. But don’t “save” there.
A properly designed, optimally funded whole life insurance policy from a mutual life insurance company is currently the safest place on the planet to save large amounts of cash reserves.
When designed with the AIS Triangle, these policies are more protected than a typical bank account and grow 5x more than a bank account. When designed correctly, you can add to, withdraw, or use your cash as collateral anytime, in any amount, without penalties, fines, or fees. And the growth is guaranteed.
Get Guarantees, Protection, and Liquidity—Plus Tax-Free Growth
Our aim at Vault AIS is to design a policy that will earn 3-4% guaranteed plus a dividend, tax-free. We use products that are contractually guaranteed to return 3-4% and also pay a non-guaranteed dividend. But the tax status can vary by state. Therefore, for the sake of simplicity, we will set the amount at a reasonable 4.5%. Once set in the contract, the percent is guaranteed and will not fluctuate with the market or years.
Now, this interest rate might not put a huge grin on your face, but 4.5% tax-free is the same as 7.5% taxable if you are in a typical 35% tax bracket. If you invest $100 at 7.5% taxable, you will earn $7.50 in one year. After paying taxes, you will be left with about $4.50, so your actual return is 4.5%.
Remember, if it’s a guaranteed 3-4%, your savings always go up; contractually, it can never go down. There is no speculation as there is in the stock market. The S&P 500 average is a non-guaranteed 9% taxable and is really just under 5% after taxes and fees. Would you rather earn just under 5% in speculation, or 4.5% tax free in your whole life policy?
A typical savings account at a major bank like Wells Fargo will pay you a 3-5% return—and that’s if you give the bank $100,000. (This is in a current high-interest rate environment. These rates are typically lower, and can change at any time. And remember that you have to pay taxes on this.) If you deposit less, it will give you less. A typical $10,000 savings account will yield 0.01%. That’s practically nothing!
CDs aren’t much better; a three-year CD from Bank of America will pay around 3-5%. Now, even if you’re really diligent and look hard enough to find some smaller community banks paying higher rates, you’d still be hard-pressed to get anything more than 5%. Government savings bonds? Series EE savings bonds are paying around 5% right now. And gold—good old gold—pays no interest at all.
The reason banks pay so little today is that they can get away with it. They know that their customers are afraid of the markets and want to keep their money in cash. They can get away with giving their customers almost nothing because they know they will accept it. But it gets worse… the interest you get on a bank account is taxable. That means the measly 3-5% you’d get on $100,000 would be worth 35% less after taxes!
When talking about savings especially, you can see how getting a guaranteed 3-4% plus a dividend (tax-free—as you’ll get with Vault AIS-designed policy) is a useful strategy. You can withdraw from your account any time, in any amount, with no penalty. It grows faster than inflation, in most cases the growth is tax-free, and the growth is guaranteed.
With whole life insurance as part of your overall financial strategy, you will also have a permanent death benefit. This can be leveraged to enable you to spend and enjoy 40-50% more net income during the later years of your life. This is most valuable piece in your Rockefeller Method legacy trust.
Know the difference between saving, investing, and gambling. Keep your savings in vehicles that are guaranteed, protected, and liquid. When you invest, stay within your knowledge, expertise, and control. This is how you build wealth safely and predictably just like the wealthy do. Just like the Rockefellers, Garrett and I do.
To learn more, get your free hardcover copy of What Would the Rockefellers Do? by Garrett Gunderson and I.
It details the financial system used by the ultra-wealthy to protect, grow, and pass on wealth.