Which Comes First, Savings or Investments?

If your mindset is saving, you will always work for someone and save. Rich people do not focus on saving, they invest.

Friend of mine

Above quote is from a friend after reading my previous blog post on “How Much to Save?”. Personally, I agree with the statement, but I have a few objections on the thought process. Before elaborating more on my objections, I’ll first acknowledge both savings and investments are important in personal finance. However, which one should we concentrate on first?

Now, let’s break down the statement; rich people focus on investment. Does that mean rich people do not save?

Note: I’ll ignore the “work for someone” bit for now. There is a big misconception on this term, somehow people like to treat it as a poor mentality. I’ll try to touch on this subject in my future posts.

Saving vs Investing

Anyway, what are the differences between saving and investing? In my opinion, saving is an act of preventing waste while investing is to achieve the desired outcome at a future date. What people tend to forget is that saving is an action within our control while the outcome of an investment is out of our control.

Note: Investment is based purely on risk vs reward rule. Majority of people tend to concentrate on reward (out of our control) and neglect the risk (within our control).   

Example: To save time, a department in a company was able to identify certain repetitive tasks that can be automated. From the time saved, the department would like to invest their time on other tasks, “hoping” it will increase productivity or efficiency. In this example, saving time was part of the department’s control while the outcome to increase productivity is out of their control (they may or may not achieve it).

Another example would be a cost saving exercise conducted company-wide. No matter how big a company has grown, the management will always stress on cost saving. The term “rich people do not save” can be easily rebuffed. There is always something to save, especially scarce resources such as money, time and energy.

Based on the first example, savings comes first, only then investment. In personal finance, we should always build the habit of savings before investing. Nick Maggiulli from Of Dollars And Data recently tweeted on the same subject with additional info. Click on the tweet to read more on it.