Coming to Terms with Saving and Investing

May 12th, 2015 → 6:37 pm @ // No Comments

In a recent newsletter from the corporate Bank on Yourself team, they quizzed individuals about their opinions on the definitions of these two terms: saving and investing.

Here’s how the Canadian Oxford Dictionary defines each of them:

Saving: An economy of or reduction in money, time, or another resource.

Investing: Put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.

See a difference? Let us expand on that.

The quiz in the newsletter offered four different answers to the question: What’s the difference between saving and investing? Here are the choices:

  1. “To save means to put money where it will grow very slowly (or not at all), and to invest means to put money where it will grow much faster.”

The flaw behind this definition is that it implies that money invested will always grow, and we know that is not always the case. With investments, along with the potential for faster growth always comes the risk for loss.

  1. “To save means to put money into any kind of an account at a bank, and to invest means to put money into a brokerage account.”

    Before 1987, this was generally true. But amendments to the Bank Act blurred the lines of investing through banks, and vice versa, setting up a savings account through a brokerage. According to a paper by Charles Freedman titled The Canadian Banking System, “there was a perceived need for lenders to corporations to be involved in both direct lending and market intermediation, and it was believed important for Canada to have an innovative and competitive securities industry at a time of increasing pressures from globalization. These were probably the two most important factors leading to the breakdown of the barriers between the banking and securities industries.”

    “There is no significant difference between saving and investing. The words mean essentially the same thing and can be used interchangeably”

As we mentioned above, generic saving does not include the risk of money loss whereas investing does, therefore, these terms are not the same. Unfortunately for those individuals who believe this statement, they could easily find themselves in a dire situation where they invest ALL off their money and end up losing most of it.

Finally, the quiz ends with what the Bank on Yourself team considers the “correct” answer to the quiz:

  1. “To save means to put money in a vehicle that is safe, protected from loss, and has guaranteed growth, and to invest means to put money in a financial vehicle or asset that has a certain amount of risk and no guarantees of growth”

Choose savings methods that fit this bill: any account that is protected by the Canadian Deposit Insurance Corporation (CDIC) and in a less traditional, but equally secure method, whole life insurance.

As the newsletter explains, and we wholeheartedly concur, “these distinctions between ‘saving’ and ‘investing’ are foundational to the Bank On Yourself concept.”

There is money that you can afford to lose should you invest it, and there is money that you can’t. Save that money by implementing the Bank on Yourself system.

This article brought to you by Stephen Devlin.

 


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