Do you save for retirement, emergencies, or big purchases? Or do you save to invest and obtain an income from your savings? One may say it does not really matter but there is a crucial difference in perspective between the two different approaches(*)

I used to be a saver. “Savers” ultimately save money to spend it at a later date. In my case, I would put away most of my money but after accumulating about $1000 it would start to burn a hole in my pocket. Therefore I would think of something to spend it on, telescopes, cameras, computers, bicycles, …

A person who puts a portion of his paycheck in a 401k or an IRA is fundamentally a saver. He may think of himself as an investor but from the point of this discussion he is not. He objective is to withdraw the money many years from now and spend it. I will give you that at that point he may become an investor because his objective will change towards getting an income from his money, but until then he is a saver because he gets no income.

An investor saves money to invest it and get an income stream. Readers may want to revisit Cash flow diagrams for the poor, the middle class, and the investor class. A good investor can obtain more risk-adjusted income from his savings than a poor investor. I eventually transformed myself into an investor and I am currently trying to become a better investor.

(*) One might argue that with the introduction of easy credit a third approach was born – the approach of the spender, who spends money he is yet to earn.

Early retirement can be achieved both as a saver and an investor, but the attitudes are different. A saver will save $10,000 which will allow him to take a months off from work. When the money is spent and he has to go back to work again. Thus this is not really a sustainable form of retirement. The traditional 401k/IRA plan is counting on the retiree passing away before needing to go back to work.

Once I heard a retirement plan that involved booking a terminal ticket on a cruise to shark infested waters in case retirement funds ran out. I would probably get a job instead 😀

To an investor $10,000 means $600 a year in income or $50 a month = a couple of nights of eating out a month for the rest of his life. On top of that comes the potential to exchange this stream of money with $10,000 in cash should the need arise. The saver does not have this option [because the money has just been spent].

Related: Check out akratic’s How I track my finances of Google Docs.

Originally posted 2008-02-27 07:33:52.