When it comes to deciding what to do with your money (instead of spending it of course), your decision is largely based on whether you are a saver or an investor.
Which one are you?
Saving and investing are often confused and used in the same context but they are not the same thing.
To properly understand the difference, let’s start with investing.
We can get a definition from the Chambers English Dictionary which defines investing as:
to put (money) into a company or business, e.g. by buying shares in it, in order to make a profit
I like this definition a lot because it draws a clear distinction between investing and the much simpler act of buying.
Buying is about spending money or “laying out” on a product or service, not necessarily with the intention of making a profit.
Investing, on the other hand, is the deliberate activity of buying something, an asset, with the expectation of making a profit during our ownership of that asset.
We can make a profit from assets in one of two ways:
- The asset might rise in price during our period of ownership so that we can sell it for a higher price than we bought it. This is known as a capital gain.
- We might earn an income during our ownership of the asset from cash flow generated by the asset such as rent, interest, dividends, etc.
Essentially then, investing involves buying assets with your cash – assets that have the potential to generate a profit in the form of a one-off capital gain or an ongoing income.
Now let’s look at saving…
This involves setting cash aside in a safe place until some time later when we might need it or decide what we want to spend it on.
Saving is therefore a passive activity, not a deliberate activity.
That’s because saving is more about holding on to what we already have than it is about making a profit from what we have.
In other words, it is focused on asset maintenance rather than asset growth.
Saving does not involve “laying out” on anything either because we expect to get all of our cash back at some point in the future.
In days gone by, people used to save their money by putting it under the mattress or storing it in a biscuit tin in the kitchen.
This is much easier to understand than modern methods of putting your money into a bank savings account because we expect to earn interest on our bank savings which we never used to receive from the mattress or the biscuit tin!
This earning of interest is probably the reason why lots of people confuse saving with investing.
So Are You A Saver Or An Investor?
If you have any spare cash in a bank savings account earning interest, then your are a saver.
If you have any assets purchased with the intent of making money from them, such as property, bonds, shares, fine wine, etc. then you are an investor.
It is, of course, possible to be both a saver and an investor and many people are.
What I am really getting at here though is whether you are currently a saver, wanting to learn how to become an investor.
If you are, then you will need to become a different kind of person because investors look at the world differently to savers and they behave differently when it comes to deciding what to do with their money.
If you are a saver but not an investor and you have some spare cash that could be invested, then ask yourself why you are not investing that spare cash?
Savers tend to err on the side of caution.
In other words, they tend to be risk-averse.
It is almost as if they look at the glass as being half empty?
Assets can fall in price, therefore they will
I don’t want to invest my money in case I might lose it
Savers seem quite content with maintaining what they have and perhaps earning a little bit of interest on their money from a bank savings account.
Thus AVOIDING the possible PAIN of losing some money is more important to a saver than GAINING the PLEASURE of making a bigger profit from an investment.
I’m going to make a giant leap here and say that if you are a die-hard saver then it is likely that you repeat this pain avoidance choice with many other areas of your life as well!
For example, do you always go to the same place for your vacations / holidays or do you try different places each time and risk it not being very good?
Do you always drive the same route to work, or shop and eat at the same places and go out with the same friends, etc.?
Maintaining ritual habits can feel warm and comforting but breaking them sometimes can be liberating and can reveal new pleasures that you never thought possible.
Yes, they may prove to be disappointing and not as good as your tried and tested, fail-safe, comfortable previous choices.
But there is no harm in spending a bit of your time or money on speculating to accumulate as long as you don’t do it all at once in a “bet the farm” kind of fashion.
If you are wanting to become an investor, then you will need to overcome some of these mental barriers that I’ve described, because that is what they are.
I’ll repeat that because it is important if you are to become a successful investor…
you will need to overcome some of these mental barriers
Investors (as distinct from gamblers – which is a topic for another day) are able to weigh up the pros and cons of each investment (asset purchase and sale) that they make.
Investors typically are savers also because they too maintain a store of cash – what I call an emergency fund – for a rainy day, just in case they need money quickly for a repair or if they lose their job or are taken ill suddenly, say.
But they also release some spare cash for investing in more riskier assets.
So investors are not necessarily as risk-loving as you might imagine.
It is true that investing is more risky than saving, because there is a chance that the asset you buy might fall in value during your ownership.
For investors to make that mental leap into purchasing an asset that could lose them money, they therefore need to have a more positive outlook than a typical saver.
Investors therefore tend to look at the glass as being half full, not half empty.
I expect the asset to rise in value over the longer term
I’m looking to make a bigger return on my cash than I can get from savings, so I need to take more risk with it
Investors will also take this more optimistic outlook to other areas of their life too.
They will try out a new restaurant to see what it is like.
They minimize their risk by doing their homework beforehand, asking other people and hearing good things about the restaurant before they try it.
They limit their longer term risk by deciding not to go to the restaurant again if they don’t like it the first time.
In other words, investors accept risk for what it is and have learned to assess, understand and manage that risk.
If you are not an investor yet, the chances are that you have already learned to manage risk in this way for some of the aspects of your life, so why not do it more?
Ask yourself, what is the worst that can happen?
You might have an awful meal occasionally but you will discover many new restaurants.
You might have a disappointing holiday occasionally but it won’t be all bad and you will see more of the world, learn more about people and experience more of the world.
You might make a poor investment choice once in a while but as long as you make more wins than losses, you will win overall and earn a bigger return from your spare cash!
Leave me a comment below with your thoughts, too!