Saving vs. Investing: What Is True Saving?

In all the financial pressure you feel to plan for the future, have you ever stopped to consider, fundamentally, what savings are?

Often, the answer is in asking the right questions. Concerning great issues, this is one that will behoove you to ask, understand, and answer that question for yourself.

Savings is a precept of wealth-building. It’s a foundational cornerstone and precursor to success in almost every other area of personal finance and economics.

And yet, frankly, the savings levels of American adults are embarrassing. Most people’s bank accounts languish far beneath the level of what they want to have.

According to Bankrate’s 2025 Emergency Savings Report, 59% of Americans don’t have enough savings to cover an unexpected $1,000 emergency expense, and 27% said they have no emergency savings at all.

A separate U.S. News survey found that 42% of Americans don’t have an emergency fund at all.

There’s a disparity between our desire to save and the amount we have.  For that reason, our mindset about savings becomes laden with guilt.

To add insult to injury, there’s confusion about what savings, in fact, are.

It’s pretty hard to achieve something you don’t feel good about or have a clear definition of. It will continually be “un-prioritized.”

So what’s the difference between saving and investing? Most people couldn’t tell you that either. We’re about to clear that up for you.

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The Nuts and Bolts

To clear the air and help you save more, let’s get down to brass tacks.

We’re tackling what savings is and what it isn’t. We’ll answer:

•  How do I know if it’s savings?
•  Where can I save my money? 
•  What are the best places to save money?
•  Is it better to keep money in savings or invest?

And we’ll share the four top reasons why people aren’t saving, to help you overcome them and set you on a course to financial confidence and freedom.

The foundations are the most important pieces to get right. Whether you have significant savings and are looking for a better storage tank, want to beef up your savings, or if you’re just getting started, this discussion will help you get the clarity you need to up-level your savings.

Related Articles and Podcast Episodes

In Why the Wealthy Love Cash (Savings) Part 1 and Why the Wealthy Love Cash Part 2, we discussed the reasons the wealthy save: to create confidence and peace of mind, to sleep better at night, and to have the liquidity to jump into the right opportunities.

In How to Save Like the Wealthy, we discussed how to design a system for managing the flow of your money that builds your savings goals and puts you in control.

Our Definition of Savings Needs Work

In this article, we’ll bring you 100% clarity on what savings are.

Firstly, let’s start with your definition of savings. What does it mean to you?  Write down your thoughts before you proceed, and we’ll revisit them at the end. Notice any ambiguity in your thinking.

If you asked a roomful of people to answer the question, “What are savings?”, chances are, you’d get a handful of different responses.

Some might say it’s having money left over each month after your spending. Another might say it’s their retirement account. Another may say savings are their savings account, an emergency fund, or a rainy-day fund.

Even the all-knowing Google or dictionary definition will yield many answers, but not give clarity on what it means financially and what to do about it.

This haziness makes it challenging to move the needle from “a nice idea” to something that’s concretely and habitually built into the fabric of your life.

What Are Savings?

The Merriam-Webster dictionary defines savings as:

The excess of income over consumption expenditures, money put by.

This speaks to the verb – the action – of saving. Saving as an action is what you do. It means “not spending.”

But that’s just the starting point. Real savings must meet four non-negotiable criteria:

1. Your principal is protected. No chance of loss. When your asset has that type of safety, it’s savings.
2. You can access your money when you need it.
3. You don’t need anyone’s permission to use your funds.
4. Your money earns compound interest consistently.

The rule of thumb is this: if the account can lose value, it’s not savings, it’s an investment.

The objective of savings is to build up an Emergency/Opportunity Fund we can use. We recommend at least six months as an initial goal. 

What Are Investments?

Investments either grow your money or produce cash flow.

While investments have the potential for gains, they also have the potential for loss. Any time you put your money into investments, there’s the possibility that your assets may lose value.

Investments inherently hold risk because there’s always an element that’s outside your realm of control. While you can mitigate your risk by investing in assets that you know and control, investments like stocks, securities, real estate, and businesses have the potential for factors outside your control to reduce the value of the asset.

Where Savings Fits into Your Cashflow Creation System

Building a stockpile of savings will help you weather months of tight income or unforeseen expenses, and will move you light years ahead towards peace of mind and financial stability. But it’s just one small step in a greater journey of building time and money freedom.  

That’s why we’ve put together the 3-step Entrepreneur’s Cash Flow System.  

The first step is keeping more of the money you make. This includes tax planning, debt restructuring, and cash flow awareness. This step frees up and increases your cash flow, so you have more to save and invest.

Then, you’ll protect your money with savings, insurance, and legal protection. Here, you’ll create the right canopy of protection in your financial life.  

This second stage encompasses all aspects of Privatized Banking, a key savings and capital deployment strategy that secures your access to capital, maximizing your control, by allowing you to be your own banker.

Finally, you’ll put your money to work and get it to make more by investing in cash-flowing assets to build time and money freedom and leave a rich legacy.

Many people put money into retirement accounts like 401(k)s and 403(b)s via automatic payroll deductions, thinking they are saving for retirement.

In reality, because their money is often invested in mutual funds holding securities that have risk and fluctuate with the value of the stock market, they are investing for retirement, rather than saving.

The ability for a stock market crash like 2008 to wipe out half of people’s “savings” exposes this strategy as an investment strategy, rather than a savings plan.

What Are the Main Differences Between Saving and Investing?

Savings and investments are two distinctly different tasks we assign to our money.

Tragically, the distinction between savings and investing has become blurred, causing many to lose control instead of gaining it.

Many people put money into retirement accounts like 401(k)s and 403(b)s via automatic payroll deductions, thinking they are saving for retirement. 

In reality, because their money is often invested in mutual funds holding securities that have risk and fluctuate with the value of the stock market, they are investing for retirement, rather than saving.

The ability for a stock market crash like 2008 to wipe out half of people’s “savings” exposes this strategy as an investment strategy, rather than a savings plan.

Why You Need Both 

Is it better to keep money in savings or to invest? You need both, but in the right order.

Foundation comes first, speculation follows.

First, establish your savings foundation. Build real savings that meet all four criteria discussed before.

Then, make intentional investment choices. When you have confidence in your savings, you can take calculated risks with your investments.

Why not just save everything? Because savings prioritize safety and liquidity—while investments sacrifice both in exchange for greater growth potential over time. A diversified investment portfolio historically yields 7-10% annually over decades, while your savings might earn 3-5%. Over 30 years, that difference can be enormous.

Investing is effective only if you can remain invested. Without savings, every emergency forces you to liquidate investments at the worst moments.

Most people invest automatically through payroll deductions and save what’s left over.

Wealthy families save automatically and invest with intention.

Reasons People Aren’t Saving

So why aren’t you saving?

It’s not about willpower or discipline. There are four specific obstacles keeping you from building real savings.

The first step in saving is to have a monthly cash flow, which is money not spent. Cash flow is the difference between your income and your expenses. You can also call it profit or surplus.

Income – Expenses = Cash Flow

To have money to “put by,” you would have to spend less than you earn. Said another way, to save, start with cash flow.

This brings us to the first reason why you may not be saving:

Reason #1: You Don’t Have a Clear Cash Flow Picture

If there’s no gap between income and expenses, there’s no money to save.

If your lifestyle regularly consumes your income, you’ll feel strapped each month.

Most people have no idea where their money goes each month. They couldn’t tell you their monthly expenses within $500. They wonder where all the money went, but they never tracked it in the first place.

Without clarity on your cash flow, saving becomes impossible. You can’t allocate money you don’t know you have.

Reason #2: You’re “Saving” in the Wrong Places

Many people think they’re saving when they’re actually investing. Your 401(k) isn’t savings – it’s an investment account that can lose value and you can’t access without penalties.

Reason #3: You Don’t Have the Right Vehicle

Traditional savings accounts earning 0.01% while inflation runs at 3% means you’re losing purchasing power every year. You need a savings vehicle that provides safety, liquidity, control, AND growth.

Reason #4: You’re Trying to Save After Everyone Else Gets Paid

You pay the IRS, the mortgage company, the credit card companies, and everyone else first. Then you try to save whatever’s left over (which is usually nothing).

Is It Really Worth It to Save Money?

When savings accounts earn less than inflation, when everyone’s talking about cryptocurrency and stock market returns, you might wonder: Is it really worth it to save money?

Absolutely.

But not for the reasons most financial advisors give you.

You don’t save for the returns. You save for the control.

You save so you can sleep at night, knowing you can handle whatever life throws at you. You save so you can take advantage of opportunities when they arise. You save so you’re not at the mercy of banks, employers, or market timing.

The wealthy love cash not because it’s exciting, but because it’s powerful. Cash gives you options. Cash lets you move fast. Cash means you never have to ask permission to use your own money.

When you have real savings that meet our four criteria, you’re not just earning a return – you’re buying freedom. Freedom from financial stress, freedom to make choices, freedom to act when opportunity knocks.

The Starting Point is Cash Flow

The starting point of savings is creating positive cash flow. This means increasing your income or decreasing your expenses (or both).

Cash flow is simply the money coming in versus the money going out. If you have positive cash flow, you have more money coming in than going out. If you have negative cash flow, you have more money going out than coming in.

You can’t save money you don’t have. You can’t build savings without surplus cash flow.

For most people, the fastest path to positive cash flow is reducing expenses. When you cut $1 of expenses, you have $1 more to save. When you earn $1 more income, you might only keep $0.70 after taxes.

But where people get stuck is that they try to cut expenses without understanding where their money actually goes.

You can’t manage what you don’t measure. That’s why the first step in our Cash Flow System is creating complete clarity on where every dollar flows. We help you find money you didn’t know you had – often $500 to $2,000 per month hiding in your current cash flow.

Once you see where your money goes, you can make intentional choices about where you want it to go instead.

The goal isn’t to live like a monk. The goal is to redirect money from things that don’t matter to you toward things that do – starting with your savings foundation.

The LUC Test

Now that you understand what real savings looks like and how to create the cash flow to build it, you need a practical way to evaluate your options.

We call this the LUC test. LUC stands for Liquidity, Use, and Control.

Remember our four criteria for true savings? The LUC test is another way to think about the same principles.

For an asset to truly be savings, it must meet the following criteria:

1. (L) Liquidity: Easily converted to cash
2. (U) Use: Can be used for any purpose
3. (C) Control: You do not have to ask anyone for permission to use your money

Simply stated, when you’re in cash, you’re poised for action.

However, many people hold assets that they cannot use or access.

The financial position of liquidity, use, and control is what allows you to take advantage of opportunities.  Your money is accessible to you, can easily be converted to cash, is available for you to use, and is stored where you won’t lose it.

When you have savings that meet the LUC criteria, and you apply (K) Knowledge to invest in what you know and control, you get LUCK.

Liquidity + Use + Control + Knowledge = LUCK

Opportunity seeks liquidity. Infinite opportunities are looking for the individual who is prepared with savings. When other people call you LUCKY, it’s often because you had liquid, usable cash in your control, and you invested with knowledge.

A Measure of the Quality of Savings

Once we’ve determined whether an asset is, in fact, savings, we can fine-tune the quality of our savings vehicle with a measurement of growth.

To recap, to pass the test to be classified as savings, the asset must have:

1. Safety: No loss of value

2. Liquidity: Access to your money

Finally, let’s talk about the component that can elevate your efficiency:

3. Growth: Earns compound interest

Compound growth has been called the eighth wonder of the world because of the exponential growth you see over time. Not only does your principal earn interest, but the increasing volume of interest earns interest as well.

Here’s how it relates to defining savings:

One of the requirements to pass the savings test is for your capital to be safe, without losing value. In any case, if you have no loss and earn a consistent, positive return, albeit small, it will result in compound growth.  However, any losses or negative returns will cancel the compounding.

To up the ante on savings, we can dial up the rate of return, as long as we don’t sacrifice safety or liquidity in the process.

Applying the Savings Test

Let’s walk through some common accounts and help you determine whether it’s savings or not. You’ll see how to apply this knowledge in evaluating your accounts to determine whether they pass the savings test, and find where you may have the potential to improve your choice of assets used for savings.

Here, we’ll answer

• Where can I save money?
• What are the best places to put my savings?

Quick Reference: Savings vs. Investments

Accounts That Are Not True Savings

Retirement Accounts like the 401(k), 403(b), 457, IRA, Roth IRA, and SEP

These types of accounts are often miscategorized as savings. While they can be invested in lower-risk funds or aggressive growth funds, most are invested in mutual funds that hold various stocks.

Stocks fluctuate in dollar value and can even lose principal with negative rates of return.  So, you may expect higher growth rates than a savings account, but you will sustain unpredictable gains and losses.

Let’s say you moved your retirement account to bonds or a money market account to lower the risk. You’d still have the lack of accessibility to contend with.

For those under age 59 ½, you’ll want to check on your plan’s “in-service distribution” options to see whether and how you can access your money.

If you’re allowed, you’ll pay income taxes if you deferred tax when you put the money into the account. Also, it will cost you a 10% early withdrawal penalty for accessing the cash before retirement age.

If you have a loan provision with your current employer, you can get 50% of your vested balance or $50K, whichever is less. Loans don’t require taxes or penalties to be paid.

However, if you have an outstanding loan balance when you leave the employer, the loan requires immediate repayment or becomes a distribution, which is income-taxable to you.

When you are of “retirement age,” past 70 ½, you’ll have a required minimum distribution. Additionally, you’ll pay the going tax rate on money you take out at that time.

These accounts don’t pass the savings test for safety; they’re not fully liquid or accessible, and they’re not in your control. Because they have the potential for loss, they don’t earn uninterrupted compound growth. Money in these funds is not savings, but investments.

Even as an investment, we don’t think they do well to meet the criteria of creating cash flow or true growth, but we’ll leave that for another discussion.

Home Equity

Home equity is a tricky one. While many people don’t necessarily approach paying off their home mortgage as savings, it’s easy to view the equity in your home as savings. After all, for many, it’s the one place where they have the most cash.

Let’s look closer. Home equity can rise and fall based on the housing market. This isn’t a “safe” account, and consequently, it cannot provide compound growth.

Furthermore, the value of your home is completely independent of how much equity you’ve built up, so it’s faulty thinking to associate your home value with a rate of return on your equity.

To access your equity, you’d have to get bank approval, based on your income and ability to repay. This isn’t in your control because it requires a gatekeeper.

Based on our criteria, home equity is not savings.

Access to Capital Through Lines of Credit

Another scenario that causes confusion is that you may have access to capital through a credit card or a home equity line of credit (HELOC). The unused balance on the open line of credit could be used for emergencies and/or opportunities, similar to savings accounts.

It’s valuable to have as many options available to you as possible. However, having access to borrow someone else’s cash is not the same thing as having cash savings yourself.

Having an open line to borrow is not savings. Rather, it’s negative savings.

However, limitations on access to capital disqualify it as true savings.

A HELOC may withstand a reduction in the underlying value of the home, leaving you underwater. It may be called due outside your control. The bank does not have an obligation to continue providing that capital access to you.

Credit cards are not a guarantee either. They are based on your credit score, and the lender may reduce your credit limit. Any time you use it, you procure a balance that requires future payments to bring you back to positive net worth. And, since it’s not an asset, but a liability, there’s no growth. If there were, it would be in the wrong direction.

Accounts That Are True Savings

Bank Accounts & Credit Unions: Savings Accounts, Checking Accounts, CDs, and Money Market Accounts

In this case, you can judge a book by its cover. Savings accounts are true savings. The account is safe, up to FDIC insurability limits. You can access your money, as long as there isn’t a freeze.

The big downside is that, while any growth you do earn is compounded, you earn next to nothing.

Growth in the ballpark of 0.04% is a far cry from keeping up with inflation alone, let alone giving you growth.

Another thing to note here is that, because of fractional reserve banking, bank vaults hold about 10 cents in reserves for every dollar on their balance sheet. If all of the depositors came to cash out their accounts at the same time, there would be a shortage of funds to cover the withdrawals.

Certificates of Deposit offer the same bank safety. Regarding liquidity, you can surrender the Certificate of Deposit early. In this case, you’d get your principal back, but lose any interest growth. You’ll get a slightly higher interest rate, but still under 1% (in today’s environment).

Money Market accounts are generally safe, with the caveat that they do have the potential to lose principal. They are liquid but may limit your transaction count. Growth is better than in a checking account, but still minimal.

Treasury Bills, Notes, and Bonds

Treasury bills and notes are safe because they are backed by the government. The purchase price is at a discount, and you receive the full face value at maturity. They are minimally liquid, as you must hold them to maturity. You have growth only if you hold it to maturity.

Bonds include US Treasury Bonds, municipal bonds, and corporate bonds. The safety of bonds varies based on the safety of the entity holding the bond. They are generally liquid because you can sell them at any time. However, you may have to sell at a loss.  

You get growth as you receive interest payments along the way, but to access your principal, you must sell at the current rates, which may be a loss. You receive growth only if you hold it to maturity or if you can sell it at a profit.

These assets meet many of the requirements to be considered savings. However, there are graduating degrees of how well a tool meets the objectives of an Emergency/Opportunity Fund. These assets don’t provide the ideal liquidity to serve that purpose.

Cash Value of Life Insurance

Specially designed whole life insurance is a true insurance product with death benefit protection, which also affords excellent safety, liquidity, and growth as a savings tool.

Regarding safety, life insurance companies have been historically much less likely to fail than banks. This is primarily due to their conservative, long-term investment strategy and their dollar-for-dollar reserve ratio.  

In a pure whole life insurance policy, there is no loss of value and no connection to the equity market. The cash value and death benefit only grow, never fall in value.

Cash value is liquid because you can convert it into cash with a simple loan request. You use the cash value as collateral in a guaranteed loan from the life insurance company.

Once you make the request, you’ll have either a paper check in hand or a direct deposit to your local bank branch or credit union, usually within a week. Because there is consistent growth with no risk of loss, you earn compound interest. 

Because of the guaranteed interest rate and anticipated dividends, a policy designed for high cash value will earn approximately a 3 – 5% rate of return, tax-free, and net of all costs, over 30 years. And that’s in today’s low-interest, low-dividend environment. With increased interest rates, dividends would be expected to rise as well, improving the net returns.

We see life insurance cash value as the ideal place to store your savings after you’re comfortable with how much on-hand and in the bank that you could get to in 15 minutes or less.

Make It Easy to Save

So, how can you make sure savings happen?

We discussed earlier that most people think they are “saving for retirement” when in fact, they are really “investing.”

One of the top reasons why people contribute to retirement plans is that it is easy. They can sign up for automatic payroll deductions, put it on autopilot, and use little mental energy to maintain it.

Savings, however, only happen if there is enough money left over. Because it requires mental attention, it often gets forgotten altogether.

They’re investing automatically, and saving intentionally, if at all.

The ultra-wealthy who’ve transcended the system are doing just the opposite.

They save automatically and invest intentionally.

Automatic Savings Gives You the Power to Make Deliberate Investment Choices

The successful prioritize savings, so they have the capital to invest when they find the right deal. They have pre-defined criteria for their investments and know exactly how much capital is required. By keeping a substantial store of cash, they’re prepared for opportunities when “cash is king.”

For this reason, savings are so valuable that they make sure it’s non-negotiable.

As income grows, they spend less as a percentage of net income so that they can save more. In this way, they give top priority to increasing net investible income – the portion of your income able to be saved and then invested – OVER maximizing returns.

They have predictable money that they can count on to be there when they are ready to make a deliberate investing decision in the right opportunity.

Improve the Quality of Your Savings

Go back to your definition of savings that you wrote down at the beginning.  How have you changed, clarified, challenged it, or made it stronger?

Maybe you’re in a position with substantial savings. You like safety.  You want access to cash. Maybe you’re planning to use it to invest in real estate, your own business, or to start a new business. You want a more efficient tool to use to store your capital.

Research savings account alternatives that give you liquidity, use, and control of your capital.

We’ve designed a tool to help you start your research.  Get Privatized Banking the Unfair Advantage: The Ultimate Guide to How High-Performing Entrepreneurs Increase Returns on Liquid Capital Without Giving Up Access to Cash.

It’s your 20-minute, easy-to-read guide to using Specially Designed Life Insurance as an ideal place to store cash.

Use This Exercise to See How Your Savings Stack Up

Maybe you’re in a position where you want to start building savings or build more substantial savings than you currently have.

Here’s a quick exercise you can do on your own to evaluate your holdings and see whether they are savings or investments.

Write down any accounts where you are holding money. Go down the list and ask yourself these questions:

1. Does this account have the potential to go down in value? If so, it’s an investment.
2. Is it liquid and accessible? If not, it can’t be used as an Emergency/Opportunity Fund.

If you are weighted towards money at risk that you can’t use, turn the tables. Start saving money today by setting your savings on auto-deposit, every paycheck, and be ok staying in cash until not only a good opportunity, but precisely the right opportunity, surfaces.

Take Action

Increase your cash flow with a Cash Flow Awareness Exercise today.

Book a strategy call to find out the one thing you should be doing today to optimize your personal economy and accelerate time and money freedom. 

Here’s What You Can Expect Next

In our next article in this savings series, Saving vs. Investing: What is Investing? Part 1 – Cash Flow, we’ll contrast saving with investing and explore the connection point between the two crucial roles in your personal economy. We’ll answer:

• What makes investing different from saving?
• What is the purpose of investing?
• How do I lower my investment risk?
• What are my top two investments?

The 7-Part Saving and Investing Series

Check out the rest of the articles, podcasts, and videos in the series on saving and investing like the wealthy here:

1. Why The Wealthy Love Cash, Part 1
2. Why the Wealthy Love Cash, Part 2
3. How to Save like the Wealthy
4. Saving vs. Investing: What Is Savings?
5. Saving vs. Investing: What Is Investing? Part 1 – Cash Flow
6. Saving vs. Investing: What Is Investing? Part 2 – Your Best Investments
7. The Family Office Model: Investing Like the Wealthy, with Richard C. Wilson