I often hear people talk about their savings and investments almost interchangeably. I hear about people taking their savings and investing it as well as people who rely on their investments to be there if they need any savings. It may seem trivial to many of you, but I believe that there is or should be an important distinction between the two.

The Purpose of Savings

The primary reason for having some money readily available is in case of an emergency. This is why you’ll hear about emergency funds time and time again from many personal finance bloggers and other financial resources. There are many different opinions about what the size of such a fund should be and how it should be determined, but it’s usually agreed that we should have an emergency fund of some sort.

Savings also provide a sense of financial security and stability. Not only does it keep you from having to constantly worry about your finances, but it also allows you to invest with confidence. You’re able to make more rational decisions when you’re not worried about having to use any of your investments for near term emergencies.

The Purpose of Investments

Investments are a way for you to secure your future and have your money work for you eventually replacing your current forms of income. Investments are meant to provide alternative forms of income or are used to increase your income producing capacity. These are all different purposes than what standard savings are meant for.

A Practical Implementation

Both of these are important aspects of your finances, and one shouldn’t be done without the other. Fortunately, it’s all too simple to make progress in both areas while also keeping them separate. All you need to do is set up two different savings accounts or money market funds into which you can easily transfer funds. Each time you get paid or have some sort of income, just take a percentage of the income and transfer some into each account. The funds in the investment account can then be used for any investments that you want to make.

It’s important to keep these account separated from the beginning. I’ve talked to some people who keep putting money into a savings account and then raid it from time to time in order to invest in various things. Unfortunately, a lot of investments seem to be so good that more money is taken out of savings than what should be. Without an adequate savings buffer, it can then be difficult to weather any investment storms that can come.

Obviously there are many different ways to handle your finances including your savings and investments. This, however, is the best way that I have found so far to handle both savings and investments. It’s simple, straight-forward, and gets the job done. What are your thoughts on the subject? Do you handle things differently?

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