Most people talk about savings and investments, but very few people (outside of the dark corners of economics & finance) actually stop to think about the differences. Understanding the differences will be important for some of my upcoming posts on the subject.
If you spend less than you earn, most people would consider that savings. It usually is, but not always. If that difference is sitting in the bank, I would call it savings. If you immediately put it into the stock market or bonds, then I would call it an investment (or even a speculation).
Savings
Savings is money you have set aside that you are not willing to lose. Safety is your highest priority here, and you are willing to give up high returns in exchange (have you looked at what your bank account is paying lately?). Typical places for savings would be bank accounts, CDs, mattresses, etc.
Investments
Investments are putting your money towards productive businesses with the expectation of higher returns than you get on your savings. In exchange, you undertake some risk that you might lose some (or all) of your investment - hopefully just temporarily, but perhaps permanently. Investing in stocks and bonds through a 401k, mutual funds, or even individual stocks where you are looking at longer-term business prospects would all be examples of investing.Speculations
Speculations are generally riskier than investments in that you are usually taking more risk in order to get a quick or larger return. Gambling is certainly an example of speculation, but not all speculations are gambling. These are usually "hot stock picks" or short term guesses as to which way prices will move. Speculations are typically short-term and not focused on the business itself, but just the price of the stock, option, etc.
When looking at your overall financial picture, it is important to understand which category above your various monies fall into. Always start with savings, move on to investments from there if you want, and even dabble in speculations once you have plenty of savings and investments. Many people should only ever have savings, and only a small percentage should ever be speculating (although many more cannot resist the temptation to dabble in speculations - ask me how I know!). Even if you are very financially savvy and have all three, the majority should be in savings and investments.
