Are You Saving or Investing?

A few simple ideas, when understood fully, lead people down the road to financial independence and wealth. You need to understand the difference between and asset and a liability. You need to understand the difference between earned income and passive income. You need to understand three basic cash flow patterns. Finally, you need to understand how your main focus in life ties it all together.

It is important to know the difference between saving vs investing. There are a few qualities that can be used to identify a savings plan. Savings plans require no investment of your time to manage. As a consequence, they do not help to increase your knowledge or understanding of money. Instead, they involve a portion of your earned income being turned over on a regular basis, to accumulate over time.

The biggest difference between saving versus investing, therefore, is a certain level of financial education. Common shared ideas fool many people of the middle class into thinking they are investing, when really they are just saving. A good example of this is mutual fund "investing". The worse part about this type of savings plan is that you have no protection against loss unless you have taken the time to educate yourself properly.

The ultimate goal of a savings plan is financial security after retirement. A savings plan will never be adequate enough to break your dependence on earned income. With a savings plan, in other words, you will be working for money (earned income) your whole life.

There are also a few qualities that define investment plans. Investment plans require a substantial investment of time to increase your knowledge and provide you with the ability to produce results. Ability gives you a degree of control, and at the same time also reduces your risk. An investment plan produces passive or portfolio income, which eventually can be grown to replace your earned income and provide for retirement.

The ultimate goal of an investment plan is to gain your financial independence. Following a good investment plan will convert all of your income from earned sources to passive income sources, such as a business or real estate, and portfolio sources, such as stock in a well managed company that pays a dividend quarterly. At this point forward, you have money working for you and you will never have to work for money again.

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