In the popular press, ‘saving’ and ‘investing’ are often used interchangeably. However, in financial circles these two terms are polar opposites in at least one important respect -The Safety of Principal.

Savings are deposits with a financial institution such as a bank, credit union or insurance company. Funds are place into an account that is guaranteed by the financial institution. The financial institution is responsible for the funds and agrees to make them available according to the terms of the deposit agreement. The obligation of the financial institution to safe guard the amount of the deposit amount is absolute. The law fully protects the depositor with all the assets of the financial entity. No exceptions; no surprises; no fine print loop holes.

Investing on the other hand, requires the acceptance of risk. Investors place their principal at risk in the hopes that they will be rewarded with a substantial return. Sometimes it works and they make significant additions to their assets. At other times it does not end well, and some, or all, of the principal is forfeit.

All financial institutions use the deposited funds to make money. Banks, credit unions and insurance companies all put the deposits to work earning interest. Banks lend the money to businesses and consumers, fund credit card purchases, create mortgages and loan money to other banks. Credit unions lean more heavily to consumer lending and insurance companies are big buyers of newly created or previously existing bonds and mortgages. All of these financial institutions operate under strict legal guidelines and are monitored by either state or federal regulators. Additionally, the depositors of each of these institutions are afforded some degree of depositor insurance protection by a government agency. (FDIC for National Banks, NCUA for Credit Unions and state guarantee funds for insurance companies.)

Important thing to remember that in a saving arrangement there is a wall between the investment activity of the institution and the deposit.

Invested funds enjoy no such protection. Common stocks, government and industrial bonds, preferred stocks and managed portfolios such as mutual funds are all investments, because they are all subject to substantial risk. Whether you purchase stocks and bonds directly or use a managed account such as a mutual fund, exchange traded funds or a variable insurance, the result is the same. The sponsoring financial entity merely acts as a transfer agent. Your assets are fully exposed to the fluctuations of the stock or bond market, which can bring profit or loss. Investing is a ‘take your changes’ deal. There is no protective financial institution acting as a safety net and there is no guarantee that you will not loose a great deal of your principal.

Regulators are extremely serious about the difference between saving and investing. Insurance agents are licensed by the various states and are authorized to sell and design financial plans that use the savings aspects of life insurance and annuities. They are not allowed to render investment advice of any kind.

The chart below shows the classification of different types of financial choices that have a guarantee of principal:

Various investment choices are listed below. Caution is urged.

Note: Investment information is available from a licensed stock broker or a mutual fund broker (sometimes they are licensed to sell both). Some insurance agents hold a license for both insurance and securities. These dually licensed individuals are allowed to sell variable life and annuity products. Variable life and variable annuity policies are not saving vehicles. The cash values of these products (except for selected limited options) are comprised of managed stock and bond portfolios and are fully exposed to market fluctuations as well as the gain or loss of the individual stocks and bonds held in the portfolio. In a variable policy the investment risk is completely passed through to the policyholder.

Note: The reader should note that this discussion in not intended to favor individuals who are: securities licensed, insurance licensed or dually licensed. The mere fact that an individual has dual licensed does not, in and of itself, convey any special expertise. Some agents hold dual licenses because they want the flexibility for their clients; others hold only an insurance license because they feel investment products are inappropriate for most of their clients.

Note on Money market accounts. Technically money market accounts and t-bills are investments. However both are of such short duration that historically, interest rates have not risen fast enough to invade the principal. Money market accounts are managed portfolios of highly rated