Savings is setting money aside and not spending it. Investing is putting money to work so that it grows. We need our money to grow over time, because prices tend to rise. When prices, in general, are rising, we call this inflation.
When we save money in a bank using a savings account, we get paid a little bit of interest on our deposit -- today, often as-little as 1% a year. That is not much growth, but if inflation is only 2-3% we are not losing a lot of value.
Over the years, losing 1%, 2%, or more of each dollar's purchasing power adds up -- we need to put money we will keep until retirement in vehicles that will let it grow more than the rate of inflation. We all need to find ways to set money aside for later in life and protect it from losing its value because of inflation.
What is an investors are people that have risk capital -- money that they can afford to lose. The put their money to work only when they fully-understand the investments they make. They also structure their investments so that they have some control over them.
Most Americans do not have risk capital. Most simply cannot afford to lose their hard-earned money. When we are planning for retirement, the money we want to invest cannot be risk capital, because this money is what we have planned to set aside to prepare for retirement. We will need it when we retire.
Some people like to think of a financial strategy that is between savings and investing. We can call that strategy being an accumulator. This is for people that don't have money to lose and prefer to protect what they have.
Investing needs to be done carefully. We need to protect the money we invest and we want it to grow and accumulate. We want it to keep up with inflation. There is a trade-off between risk and the return we earn.
Safe investments pay relatively small
interest/returns. Risky investments probably can earn more, but we
are more likely to lose money -- perhaps all that we have invested.
The safer an investment, the less we can expect to earn. The
riskier an investment, the more we hope to earn.
Be careful! Many people are not saving as much as they should and
they hope that higher earnings will offset this. This can be
risky.
Gambling is when people take money
they can not afford to lose and put it where they may lose it or make
investments they don't understand. Gamblers often keep playing and
losing. They tell themselves that their luck will turn around. The
don't quit until they lose it all.
Gamblers place bets through bookies. Investors in the stock market
buy stocks through brokers. Each of these makes money whether you
win or lose. Remember, no one should invest or gamble any money
that they cannot afford to lose.
When we are talking about retirement, there is a danger zone
-- the 7 years before retirement and the first 7 years after retirement.
When we lose money during this danger zone, this makes it difficult to
retire as we planned.
Some advisors think that most Americans should not be investors or
gamblers. They should be accumulators. This
means putting money to work to keep up with inflation and grow, but to
stay out of anything risky. Remember, lower risks mean lower
returns. Higher risk may mean higher returns.
Accumulators accept reasonable returns that let their money grow will keeping up with inflation rates. Instead of worrying about high returns, however, accumulators plan their finances to save a little more. We can meet our savings goals by setting more money aside, putting it to work in relatively safe investments that pay reasonable and typical returns.
When getting investment advise, be careful and
always do your research. Be careful when someone gives you advise
that sells a product or services. They will often tell you good,
useful information, but it is often designed to get you ready to buy the
product/services they offer.
Many that offer advise about retirement are life insurance salespeople.
They may tell you they have "insured savings plans", because if you die,
the life insurance pays a lump sum of money as a death benefit.
They may sell you a form of life insurance called "whole" or "universal"
life that claims to build your retirement savings.
It is against the law to represent life insurance as
an "investment", because it is not. Life insurance salespeople
learn to be very careful about the words the use to describe their
products. If someone tries to sell you on being an "accumulator"
instead of an "investor", they are probably trying to sell you
cash-value life insurance.
Some people do very well using life insurance policies as part of their
retirement plans, but do not just sign up for a policy when someone asks
you to buy. Get information. Ask for time to think about any
sales offers.
Check with other life insurance sales people if you decide you need to buy life insurance. There are many different options. Do not let anyone tell you that it is impossible for you to invest and that you should "accumulate" instead -- this is not true.
It is true, however, that no one should invest money in anything with risks unless they can afford to lose their investment. At the top of this webpage is a chart that shows an investment pyramid.
We can build a savings plan using bank accounts for safety. We can then find other safe investment vehicles that will pay us a little more than the bank. Once we have these plans working, we can evaluate investments that, while a little riskier, may pay us a bigger return on our money.
No one should buy life insurance unless they need to leave money to someone or a family should they die prematurely. Never let anyone sell you life insurance as an "investment" or as a retirement plan. But if you have a need for life insurance, it may be worthwhile to look at using cash-value life insurance to meet your financial goals.