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What Is Savings? Saving vs Investing
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What is savings? How do I identify whether something is or is not savings? This distinction has a lot of people confused, and as a result, most people don't have the savings that they want or desire in their wealth building strategy.
The habit of spending less than we earn and paying ourselves first is critical to building wealth, and yet most of us feel guilty because we don't have enough money in savings.
I want to change that.
Savings is money that is not at risk of going down in value.
If the money is exposed to market risk, it's not in fact savings.
Confidence and peace of mind come from knowing that you have that firm foundation, that strong footing beneath you that you could handle any emergency or opportunity that arises.
The second test that you can use is something called the LUC test, L-U-C. This stands for liquidity, use, and control.
Liquidity means how quickly can something be converted into cash?
Use means can I use it for anything that I want?
Control means it is free from gatekeepers or thresholds that I have to get through to access my money?
The third thing that we use to classify what is the best savings, not just what is savings, is growth.
Growing is something that we want because we want to have the greatest growth rate on our money without sacrificing liquidity and safety.
People often mistake investing for savings. We see people putting money away into qualified retirement plans, things like 401Ks, 403Bs, IRAs, Roth IRAs, and a lot of times this is money that's going in from their paycheck pre-tax, and this money goes over into a qualified retirement plan tax-deferred.
You will pay taxes in the future even though you're not paying tax today. The second piece is that this money is usually invested in mutual funds, which is a basket of stocks and bonds and securities that have the potential to go down in value. Therefore, when you put money into qualified retirement plans this is not saving, it's investing.
That is what causes that lack of confidence because you're not able to have that security of knowing that money is going to be there for you.
Often it's not as accessible to you. Most qualified plans have money locked up until you're 59-1/2 and if you access it before that, you're going to pay taxes and penalties for accessing that money.
Some of it may be available, but you may not be able to get access to all of it and you do have to qualify to use that money.
I hope this sheds some light and gives you some clarity into how you can save more money, how you can make sure that you understand the difference between saving and investing, and making sure that you're passing the LUC test.
Is it liquid, usable, and in my control? Is it safe versus at risk?
I hope this gives you some hope and some permission to be able to save your money so that you can build a secure and robust emergency and opportunity fund so that you can have confidence and peace of mind in your financial life.
#whatissavings #savings whatissaving
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