Savings vs Investment vs Speculation – 2021 Q4

Tom’s Quarterly Reads

Here is what I’ve been thinking about, plus the best articles I read over the past three months, mostly all finance-related. Your feedback is always welcome, and please share this with anyone else who might be interested. Subscribe here.

Just Read This

The New Fear and Greed (Reformed Broker): Insecurity and Envy. This is so good. “The more exposure we have to the way others are investing, the more we begin to look at their returns as though that’s the appropriate benchmark. All sense of reason and perspective is left behind. If that asshole is doing it, I can do it better.”

Tom’s Thoughts: Savings, Investments, and Speculation

Prompted by a discussion I saw on Twitter, I’ve been thinking about how to define the terms Savings, Investment, and Speculation – and more importantly, how they relate to one another. A few of the replies to the original post were thought-provoking (here and here), but they didn’t quite hit the nail on the head. So I’m going to use way more space here than Twitter allows in order to lay out my response to the question, and why it matters.

All the assets a person owns can be classified into one of these categories (Savings, Investment, or Speculation), and so parsing the differences between them can provide a framework for thinking about how someone allocates their wealth. A pedantic discussion of financial terms is also very on-brand for me, but that’s beside the point. 

First, it’s worth acknowledging the general use of “savings” to mean “anything not spent” – meaning that Investment and Speculation could well be considered subsets of Savings. While this is valid, I think it’s more useful to consider Savings, Investment, and Speculation to be our three options for all money we don’t spend immediately. With that in mind, here are my definitions of each term:

1) Savings: Money set aside in order to guarantee having a known amount at a future date.

2) Investment: Putting money to work with the reasonable expectation of long-term growth, in order to fund long-term spending goals.

3) Speculation: Spending money for a very small chance at a high payoff.

The really interesting part of this, for me, is where the categories intersect. There is no target ratio between these three; the proportion of your wealth in each category can, and likely should, shift during your lifetime. Building up an emergency fund is a crucial first step to financial stability, so Savings is often the vast majority of assets for someone just starting to build wealth. Over time, the other categories (particularly Investment) will likely overtake Savings while building towards financial independence.

Savings is usually held in guaranteed accounts and is not put at risk because the time horizon for assets in this category is very short – usually a few months or maybe a year. An emergency fund is a great example of Savings because it is usually held in cash, is able to be accessed at any time, and (even though you hopefully never actually use the money) it constantly has a time horizon of a month or two in case an emergency suddenly pops up.

Where my definition likely differs from some others’ is that Savings should NOT be expected to keep up with inflation. The purpose of Savings, as I defined it, is to have the exact amount of money you expect on a certain date. If paying for a financial goal requires growing the amount of money you have – and paying for almost anything more than 12 months from now likely requires more than its current cost – then you have to invest the money for it to grow. 

Investments will likely make up the majority of financial assets for someone who has been building wealth over time, and it can take an immense number of different forms. Owning stocks or bonds are the classic examples of investing, but there are many others, such as owning a business, operating a rental property, or anything else with a reasonable expectation of providing long-term growth in value. There are plenty of low-risk investments that may be acceptable to many people as places to hold their emergency funds or other short-term money – and that’s okay. But any time there is a chance that a pot of money could decrease in value, it’s in Investment territory and no longer Savings. And any time you move money between categories, it should be a conscious decision.

Conversely, there should also be active decisions to move from Investment back into Savings territory. The concept of Enough is extremely difficult to wrestle with but once your investment has grown enough to pay for whatever goal you designated that money for, then it’s probably time to consider moving the money out of the Investment realm.

For any amount of money that is in the Investment category, it should be invested in such a way that the risk of it losing value is properly balanced against the time horizon on which you expect to need or use the money. This will differ from person to person based on their approach to risk, but the principle is the same. If you invest money in order to fund a house down-payment, the way that money is invested will differ if you believe you are 10 years away from buying a house or three years away. And then, when you think you’re within a year or so of purchase, that investment will likely shift yet again. The alignment of risk tolerance and time horizon is a massive subject in its own right so I’ll skirt around that rabbit hole without diving in (at least for today).

The crossover from Investment to Speculation will be different for everyone, because it occurs when you no longer have a reasonable long-term expectation of increasing your money’s value. Putting down money with the expectation you’ll never see it again may sound absurd, but it happens all the time. Lottery tickets are a great example of this; the expected long-term return on lottery tickets is negative, but the allure of such a large payoff keeps people coming back no matter how remote the possibility. The low-odds, high-payoff nature of Speculation is what makes it so appealing, but aside from lottery tickets we often don’t know the exact probability of a payoff. Using a startup company as a more interesting example, different people apply different odds that the company will succeed, and that is why some walk away, some throw a few dollars at it, and some people go all-in. 

The unique thing about Speculation is that its time horizon is “Never”. There is no point in the future at which you can truly plan on having the payoff from a speculative venture. If the payoff happens, that’s a wonderful problem to confront and hopefully you can immediately check a number of financial goals off your list that your Investments may never have supported. But at the time you choose to pay out speculative money, the expectation is that you’ll never see that money again. As a result, I would argue that money spent on speculative ventures is best grouped under “entertainment”; it’s fun, and the expected financial return is the same as buying a movie ticket. This also helps us with sizing speculation versus the amounts we invest and save: it should be relatively small, and proportional to your entertainment budget (like what I call a “steam valve” account).

In practice, most of our time is spent deciding how to invest the money that falls in the Investment category, because those returns are easily calculated and displayed in bold red or green print. But it’s important to periodically take a step back and consider how we split up “anything not spent” between Savings, Investment and Speculation – and how to shift the mix of assets across those categories as wealth grows. You certainly don’t have to use my definitions for those terms, but you should have a framework that works for you in order to make conscious, consistent decisions with your money.


Is Hyperinflation Coming? (Pragmatic Capitalist): No. No, it is not. ‘Higher inflation than we’ve seen for the last two decades’ and ‘hyperinflation’ are two very different things.

How to Invest Your Money When Inflation is High (Of Dollars and Data): A useful overview of the types of assets that have, historically, tended to do better than others during periods of higher inflation.

U.S. Inflation: Which Categories Have Been Hit the Hardest? (Visual Capitalist): Inflation is certainly not equal increases in prices across every product and service in an economy. This is a great overview of what categories have seen the highest inflation levels, which can help explain why some people may feel inflation has been higher than what others have seen.

Series I Savings Bonds (Financial Planning for Good): Comprehensive overview of Series I savings bonds, which are currently paying a relatively high rate of interest, but which come with some significant caveats.

Personal Finance

Opportunity Cost and Attention Thresholds (Eric Jorgenson): As you grow and your net worth grows, the decisions that are actually worth your time, attention and stress change. This piece helps put some numbers on what decisions are worth your time, given your net worth, income, etc.

The Many Worlds of Enough (More To That): “The skill sets you develop, the things you learn, and the people you interact with vastly broadens the landscape of possibilities for you. What you once thought was implausible will feel inevitable given what you know now.”

Foundations of Finance Online Class (Aswath Damodaran): Aswath is a Professor of Finance at the Stern School of Business at NYU; this Twitter thread has links to a number of courses he teaches which are entirely free and posted online. Lots of courses to choose from, but starting with his financial basics class – particularly Time Value of Money and other concepts – is a great place to start.

Why are so many Americans quitting their jobs? (NPR): “The family pressures imposed by closed schools, the closing and reopening of businesses, the reshuffling of the population to different locations and industries, and the fear of the virus in face-to-face settings have all also almost certainly played a role. But the historic rise in quitting also seems to be about more than all of this.”

Cryptocurrencies and NFTs

Understanding NFTs in one picture (Adam Sacks): This speaks to me since I love the Lord of the Rings, but I think it captures the weirdness of NFTs extremely well. There is also this Twitter thread that makes the argument that NFTs are a scam, and uses the International Star Registry from the 90’s as an analogy.

The Problem With a Bitcoin Futures ETF (ETF Trends): This is a great example of the necessity of understanding exactly what you own when investing. An ETF of Bitcoin futures is very different from one that owns Bitcoin itself, and this article breaks down the intricacies of futures contracts. Worth also looking at this tweet from December, showing how the ETF was down 19% since it launched, versus Bitcoin itself only being down 9% over the same period.

The “To the Moon” Crash is Coming (Vice): While I think the headline is a bit too sensationalist, the interviewee makes an interesting case that many investments today are predicated too much on hype and manufactured expectations, rather than fundamental cash-producing technologies and businesses. An excerpt: “I think a lot of people took the Elon playbook and basically said, if I just promised the moon, I can get too big to fail, I can just keep raising money as I raise expectations. And if I raise expectations, fundamentals don’t matter.”

Christmas morning was a blast, although I didn’t join the matching outfits club.


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