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Should I Save Or Invest? Saving vs Investing [Full Explanation]

Should I Save Or Invest? Saving vs Investing [Full Explanation]

Should I Save Or Invest?

We've all probably heard about saving and investing.

The earliest memory being your parents nagging you to 'save your money' and not spend it.

Saving is always looked upon as a smart thing to do.

Instead of spending your money, why not save it in your bank and let it see another day?

On the surface, this does seem like the smart option.

What we fail to differentiate however is how investing and spending are two different things.

Let's begin with their basic definitions:
  • Saving - To budget, to economize; to put money aside for the future. This is money not being spent.
  • Spending - Give (money) to pay for goods, services, or so as to benefit someone or something
  • Investing - put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit
There is a distinct difference between all these three things.

The biggest difference is the phrase in the definition of investing that reads 'with the expectation of achieving a profit.'

This phrase is only available in the definition of investing.

When we invest, we expect that our money will lead to a generation of profit.

'Spending' money on a donut, however, will not yield a profit.

So when should you save money?

I believe that saving is indeed a smart thing to do.

Usually investing is tied to the notion of putting money in the financial markets but this is not the only way to invest as we'll discuss later.

In the financial markets, over 90% of people lose money in the financial markets.

This is because lots of people jump into investing or trading based on FOMO (fear of missing out) and a lot of hype around a certain asset.

This is when I think you should save your money - when you're unsure of what to do with your money.

It's better to save your money rather than lose it due to the fear of missing out - it never ends how you want it to end.

On the other hand, why should you not save your money?
 
This is a simple answer yet overlooked by a lot of people.

When you save your money, you're essentially losing money.

Let's say you have £10,000 put away in your bank.

That £10,000 will most likely gain interest of 0.01% per year.

This means, next year, you'll have made a whopping £1 back on your money.

That's cool - you made £1 over 365 days for doing nothing!

Wrong.
Should I Save Or Invest? Saving vs Investing [Full Explanation]

The inflation rate (in the United Kingdom) per year is also around 2.5%.

This is how fast your money depreciates in value meaning you're able to buy less with the amount of money you have.

With an inflation rate like this, it really means that next year, you'll have around £9750 in value.

So saving is never a sustainable long-term strategy for growing your money.

Now here was the mistake I made.

Before I started business and entrepreneurship I would often say "if only I had £10,000, I'll make a lot of money by flipping it."

During my first e-commerce business, I was scared to 'spend' money because I didn't know if I'll earn it back.

Going back to our definitions, this is not called 'spending' because I was putting money into something I expected to make me a profit - therefore, I was actually 'investing.'

I fell into the same trap when I was trading forex.

I was scared to spend my own money because I didn't know if I was ready to play with real money.

This again was not spending because I was putting my money into assets that could generate me more money.

Around this time is when I discovered the power of investing from the book 'Rich Dad Poor Dad' by Robert Kiyosaki.

He explained investing as 'each coin is a worker which goes out and makes you more money.'

When I was in the social media marketing arena, I 'invested' $1000 into a course because I thought it would end up making me a profit.

Now with my most recent startup - Condensr, I invested over $2000 to get a prototype built.

As you can see, investing is not only in the financial markets.

Investing can be done in many different areas - the markets, education, real estate, businesses and even buying books.

Investing can be anything you put money into with the expectation to generate a profit from it.

In another article, we'll talk about how any asset (depreciating too) can be an investment.

But in short - there are YouTubers such as Manny Khoshbin and Tall Guy Car Reviews who have managed to turn their love for supercars, as an example, to generate a profit.

Therefore, were they really 'spending' money on cars, or did they 'invest' in the cars?

By now you probably know my position on investing and saving.

But what should you invest in?

Should you invest in the financial markets?

Should you invest in real estate?

It all depends on your end goal and where you're starting.

If you're anything like me, you're probably very early on in your entrepreneurial journey.

Should I Save Or Invest? Saving vs Investing [Full Explanation]
The first thing to understand is that an investment doesn't have to be a monetary investment - you can invest something like your time too.

On your entrepreneurial journey, knowing what to do and when to do it is one of the most important things.

Therefore, investing time in learning and mastering your craft should be a no-brainer.

But 'where should you invest your money?' is probably your question.

Let's explain this through an example.

In the stock market, there is something called an 'index fund.'

These are funds designed to track a specified basket of underlying investments.

There are two big index funds called the S&P500 and also the Dow Jones.

The Dow Jones is usually a measure of the stock markets overall direction - it does this by tracking the stock prices of the 30 biggest American companies.

The average 1-year return on the Dow Jones is 2.61% whilst the average 10-year return is 10.68%.

On the other hand, if we look at something called a 'Hedge Fund,' a fund that uses a range of investment techniques and invests in a wide range of assets to generate a higher return than what's expected of normal investments.

The biggest hedge fund, Ray Dalio's Bridgewater Associates, has a yearly return of 11.5% per year which is a lot higher than the Dow Jones and the S&P500.

Now to be able to invest in the Bridgewater Associates fund, you need between $500,000 and $6 million depending on the investment strategy.

Most of us may not have capital like this to invest - so where should we put our money to work?

The answer is businesses.

There are a lot of business to either build or buy.

Since I don't have experience buying businesses, let's focus on building.

I've previously mentioned some of the best businesses or industries to get into, especially as the world is moving along faster than we could have imagined.

I've even mentioned the sort of things to focus on and follow when starting your own business.

But why is investing in building a business better than investing in the stock market for example?

The answer is simple - successful businesses make more returns.

The chances of starting a successful business are somewhat higher than successfully making a return in the stock market.

Around 90% of people lose money in the financial markets whilst around 50% of businesses fail within the first 5 years.

These figures, however, are only figures based on registered businesses.

There can be a lot more stories we don't know about based on businesses that were not registered.

The great thing about businesses is that you can start a profitable business within the first day.
Should I Save Or Invest? Saving vs Investing [Full Explanation]

There are businesses like e-commerce, service-based such as marketing agencies or even print-on-demand stores that allow you to start for completely free.

With a startup business, you will have to reach a state known as product/market fit in order to scale rapidly.

Once you've managed to do this, your business can grow at 100% YoY (year over year) or even faster in some instances.

In the book 'Zero To One,' Peter Thiel describes their growth curve with PayPal and how quickly they managed to reach 1 million + users and the maths behind it.

Keep in mind that both investing in the stock market or in building a business will come with a certain level of risk.

What do you think is the best way to invest your money?

Do you prefer to save your money or make it work for you?

Have you learnt something new? Let me know below!

Till next time,
Mohamad


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