Investing versus Saving

While it is wise to save money regularly and to invest prudently, I thought you might enjoy reading this short piece on the difference between these two fine habits. The quotation above from Charlie Munger will probably mean more if you know this: Munger is the long-time partner of Warren Buffett. Buffett himself is deemed to be the finest investor of all time, and is in the top-tier of super-billionaires on our planet. While not in that league, Munger is no economic slouch. At the time of this writing, late 2007, Munger was ranked by Forbes as the 239th richest American with about US$2 billion to his name. Most people reading this would be happy with just 1/2000 of that, or US$1 million. Am I right? If you fall in that hopeful category, then I'm here to let you know, in all humility, that the first skill you need to develop within yourself is the ability to save aggressively. If you're accustomed to roaming the aisles of well-stocked bookstores, and if you've made it a habit to read books on personal finance and financial planning, chances are good that you believe the first step toward succeeding financially is saving 10% of what you earn. In my day-to-day work as a financial planner and retirement funding specialist in sunny Malaysia, I've come to realise that while 10% is a laudable savings rate target for beginners, those who are serious about succeeding financially should save more. Much more! That's why I try to encourage my own clients to make gradual, gentle changes to their cash flow patterns. My goal is to help them slowly ratchet up their personal net savings rate from perhaps as low as one or two percentage points to as high as 40% to 50%! Needless to say, my consistent advice toward this end has not made me overly popular with certain segments of the hardcore 'plastic therapy' crowd! I don't mind; and neither should you... You see, for you to move forward and truly succeed in the economic realm of life, you must get serious about spending less than you earn, and then about saving and investing the difference! Long-term financial success is achieved through that prosaic route. There is no rocket science involved in this, because once you get to the point of spending less than you earn, your cash flow pattern each month will reflect that of an accumulator of wealth. The more you accumulate, the better it will be for you... but only up to a point. I discourage the more (shall we say) inspired of my clients from going beyond a 50% net savings rate. Incidentally, that is where I hold my own savings rate at. Why do I do that? Well, to me the idea of setting money aside, initially for savings and later for wise investing, is to work toward a bright future tomorrow. But ultimately God alone knows how long we have on this spinning ball called Earth. Any of us could end up shuffling off this mortal coil sooner rather than later. Therefore, it's imperative that we also learn how to spend money on ourselves and to enjoy this journey we're on. Life is way too short, and it should be lived and savoured and enjoyed. To achieve this end, a healthy balance between immediate gratification and delayed gratification, present consumption and anticipated future consumption should be achieved. So, within our context - saving versus investing - I believe the correct balance is to spend half of what we make on living the best possible life we can today and the other half should be set aside for tomorrow. Now, when it comes to doing so, the initial act of saving and investing is the same: Money is channeled out from our regular expense patterns and shunted to holding tanks or reservoirs. Up to this point, both saving and investing are identical. But after that there is a subtle but important shift between the two habits: When we save money, we choose to reduce our level of consumption and thus proactively lower our present lifestyle. (For some interesting, When we invest money, we hope to do so successfully so that our future level of consumption will be higher and thus our future lifestyle will be better. And that's the core difference between saving and investing. If you're tempted to ask which habit is more important, please allow me to stop you right now! Asking that is like trying to figure out which is more important, breathing or eating, your brain or your heart! By the same token, both saving and investing are equally important. However, if you have not been saving or investing up to this point of your life, I suggest you begin by saving first. That's because it is always safer - and I think, wiser - to begin investing with your own money. And obviously you can't have any money to call your own unless you first channel it out from your regular consumption pattern, in other words, save it.