Saving Money vs. Building Wealth | Key Differences

Short term losses aren’t always a problem  

We recently heard from some of our clients that they were losing money on their investments. That’s not an unusual statement from people whose debts we are helping to conquer. What’s interesting is that these clients were losing money but were still HAPPY with their financial decisions. What these clients were touching on was a sophisticated understanding of the difference between building wealth and saving money.  

Saving Is Crucial

We are big proponents of saving money. We work with America Saves as campaign sponsors for Inland Empire Saves and San Diego Saves. In fact, we were named a “2022 America Saves Savings Champion” organization. A title we proudly wear!

We want to see everyone set aside enough money to weather a crisis and achieve their goals. But just as critical as the act of saving is the understanding that saving ≠ wealth-building.

Saving money is the act of collecting and storing funds. It’s essential to do, because it allows you to have cash set aside for emergencies and provides a backup should something unexpected happen. But right now, no one is earning enough interest on their savings account to offset the cost of inflation. So, while saving money provides security (again, we highly recommend “saving”), it doesn’t help you build wealth.  

Pay off debt to enhance your wealth building  

The thing we are experts at is eliminating debt. And if you take this seriously, you will enhance your wealth over time. Every dime you pay in interest toward your credit cards is money that isn’t going into your nest egg or toward financial investments.  

Stick with a debt management plan or use the debt snowball method to knock out your debts and avoid debt in the future. Just as people aren’t intuitively good at knowing how much their savings will benefit them in the long term, they don’t know truly how much their debts will cost them over time. Spend some time with one of our calculators if you want to get a sense of how much you’re losing if you carry debt from month to month.

Preparing for retirement  

The people who aren’t happy when the market dips are retirees and people near retirement. For them, a short-term drop in the value of their retirement fund can be devastating.

Savvy financial advisors won’t let this happen to their clients. They’ll steer your funds to more stable investments. These investment vehicles won’t earn as much money, but if you’ve prepared properly, you can avoid taking losses when there are market setbacks.

Please note, that we’re not investment advisors and we don’t give any legal advice. Talk to a Certified Financial Planner or investment advisor to make sure your retirement funds are protected if you are nearing retirement. In the meantime, do check out our free “Basics of Financial Planning” booklet from our Downloads page.

What EXACTLY Is Building Wealth  

To build wealth, you need to earn, save, invest, and pause. For most of us, earnings alone aren’t enough to truly become wealthy, but if we save and invest wisely, we can build up to a comfortable retirement someday. The key is to make your investment something that can grow and earn money later.

Consider, as a basic example, paying for college. On average, a college graduate with a bachelor’s degree in the right field of study will earn a million more dollars over their lifetime than someone with only a high school diploma. So even if college feels expensive in the short term, and leaves you much worse off financially today, over your lifetime, you will build far more “wealth” because you invested in college. However, whether “college pays” or not will depend on the student graduating with the right major at the right cost without too much debt.

When it comes to financial markets, most of us are setting aside money in a 401(k) or other retirement vehicle, and those contributions are ongoing. In this case, if you’re of working age, it’s a good thing if the market drops today. Even though your 401(k) seems to have shrunk and you’ve lost money, the contribution that comes out of your next paycheck buys you that much more. When the value of your fund goes back up (as it usually will), you earn much more than if your retirement fund had stayed the same or grown steadily.

A common misconception about economics is that money is the only value. We reinforced this misconception earlier in this very article when we talked about college graduates earning a million more dollars over their lifetimes. While that statistic is true, not every aspect of wealth can be measured in dollars and cents.  

Wealth is about the future. A young person with a college degree has a lot of wealth-building potential, even if their income is relatively low today. However, going to a four-year college after high school is not some students’ choice. Vocational schools, or trade schools, offer a variety of careers that offer wealth-building potential. These include construction, carpentry, metalsmithing, cybersecurity, culinary arts, and law enforcement.

Some things are hard to put a dollar value on, like “health wealth”. If you have diligently saved and built wealth over time, maybe you can afford to eat healthier or have the free time for frequent exercise. These health benefits can be enormous, but nearly impossible to put a dollar value on.

The ways we store our wealth vary greatly, and they’re not always in the form of money. Maybe you have a piece of land you’re paying off, and you plan to build a retirement home there someday. The land’s dollar value might not come close to measuring its importance to your future plans.  

Diversification is important for saving and investing. Don’t put all of your money into any one investment, so if that investment crashes, you aren’t wiped out. This is the standard advice, but diversification can go even further. Some wealth can be stored in non-monetary form.  

Wealthy people might own precious metals as a store of wealth. This is usually to take advantage of their stable value, rather than as an investment designed to grow. Rare collectibles might be a way some wealth can be stored as well.

These days, cryptocurrencies offer an opportunity to diversify a portion of one’s portfolio. This is not something to enter into lightly! We’ll talk more in-depth about crypto in a future article, but especially savvy (and risk-tolerant) savers might do some research into diversifying with cryptocurrency.  

Building wealth is a big topic and there is a lot to think about, but for today, the key things to remember are:

• Building wealth is a long-term endeavor
• Paying off debt is a big step to wealth building
• Savings is not the same as wealth building

Stick with your plan to eliminate debt and make regular savings a permanent part of your budget. Once you have enough set aside for your emergency fund and short-term goals, then you can think about ways to invest your savings to build wealth over a lifetime.

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