Saving vs Investing: Why You Need Both to Build Wealth
Before I fully delve in yes you 100% need both to build wealth, and they both go hand in hand. In today's world you do not have to go far to find influencers, say invest everything you earn to avoid the loss of eroding dollars due to inflation. Simultaneously it is easier for newer market participants to count their brokerage accounts as fixed savings even though the cash is being held in a trade ready stock account. So, what is the fine line, should you save your money or invest? What if my savings lose value to inflation? What if my investment loses in actual return while I am trying to save? Should I save this birthday present or invest it? Or why should I do both at the same time?
The relationship between saving and investing is not one that should be separated, rather think of them as brother and sister. If you are a long-term investor growth, value, Emerging Market understanding that cash is a position not a failure is a part of portfolio management as well as life risk management. What I am saying is if you have the wit to deposit into a stock account you need to be applying the same logic to savings, but I do believe it can be approached differently. At no point in this blog am I opposing idle cash losing value. I would like to point out the facts on why both are necessary and the behavior not theory that can be applied to make compounding growth towards the future.
If you put all of your hard-earned dollars into the market what will happen in an emergency? No, I am not saying that you will need brain surgery but what if your car engine blows out and suddenly you are get hit with a new bill? Savings are not made to outperform markets; they are meant to outperform stress. Someone once told me as an intern “where money feels safe it wants to grow” unfortunately a brokerage account does not provide the same functionality as an emergency fund. You are one click away from risk and one bad call from high leverage. I like to think of this in the concept of if it is in front of you it will be spent. We all know of the difference between a savings and a checking account and a brokerage account that fits that profile.
Short Term Vs Long Term
Savings exist to solve short-term uncertainty; it does not provide growth although cash is not idle its optionality. Cash lets you wait, choose, and survive volatility without panic. Savings gives you the option while investing compounds growth in the long end. If all your money is invested, you risk being unnecessarily reactive (Selling stocks early to cover a car repair). If all your money is in cash, you miss compounding growth and lose value to inflation over the long term. We have savings made for the short term because if we did it long, we would lose to inflation. Investing covers the long end to beat inflation and compound yearly.
The Combination of saving and investing is one that realistically flows together. Retail market participants often do add monthly to their stock portfolio if an investor is adding $2,000 a month into a broker account. Even taking 3% of that monthly into a high yield savings account and setting up an automatic deposit system that pulls your 3% monthly. Yes, I get 3% of $2,000 is $60, but that is the point. Saving is not supposed to be flashy it is supposed to be something that you do not think about and can do consistently the small amount is intentional we want money to compound but at the same time we want to seek long term growth through investing. What if I tried to do $1000 a month while doing my $2000 portfolio deposit because my situation allows?
Well then you can also do $2500 in stock and $500 in savings, the whole point is whatever you are putting aside to save. Needs to be an amount that gets pulled from your account without you doing anything (setting up automatic deposit) but more importantly it needs to be an amount that when it does leave your account you do not realize it. Even if it is $20 dollars that compounds monthly. You want to stay in the game like I said this is not chasing growth this is not flashy we are doing boring work but making it, so we do not even have to think.
