There’s a financial statistic that has a lot of doom-mongers in a panic: the savings rate. That’s a figure that governments track, to determine how much disposable income we taxpayers are socking away into our bank accounts. And apparently it’s now in steep decline.

In the U.S. today, the savings rate is actually a negative number. This suggests that not only are Americans not saving any money, they’re actually digging themselves deeply into debt.

Surely this suggests some sort of crisis in the making? That shouldn’t surprise us: our consumer society always encourages us to spend rather than save.

As a financial advisor, it’s my job to convince people to set aside funds for worthwhile activities – such as eating during their retirement. (This is particularly an issue since the globalization of our business world has meant an end to many pension plans). So naturally, I’m not one to suggest that a negative savings rate is a good thing.

But to me, something sounds a little hollow about this scary “fact.” For one thing, we all seem to be quite a bit better off financially today than the last couple of generations have been. So let’s examine the evidence carefully.

First off, the way the U.S. government measures the savings rate seems quite flawed to me. For instance, it doesn’t count as “savings” the money American put into their 401k plans – the U.S. equivalent of our RRSPs. It also doesn’t count the money they use to pay their mortgages; the equity owners have in their businesses; or capital gains on stocks.

I consider all those things to be valid savings vehicles. Frankly, if I were to remove all those aspects from my own wealth-creation activities, I’d quickly find myself in “negative savings mode” as well.

The fact is that in the last three years, the value of all assets in the U.S. has increased $16 trillion (net of debt). Another way to put that: all of America’s households have become $140,000 richer during that period.

So what’s going on here? One answer is bad measuring practices. The government is looking only at people’s bank accounts. But if you just measure those, you’re not really seeing the full picture. There are many better vehicles than savings accounts to put money in these days, and smart investors are taking full advantage of them.

Another answer is that many people today create their wealth less through savings, and more through equity. Most really wealthy people develop and/or sell businesses, invest in real estate, take an ownership position in firms, create professional practices. These are all examples of building wealth through equity rather than through savings.

I usually advise my clients to have an equity creation plan. The great thing about equity is that it grows like corn in the night: you just need to get the seeds started, and then stand back and give it time. The equity in your home builds slowly but surely. A successful business too operates on a day-to-day basis – and over time it amasses a pile of equity.

Of course, this approach isn’t for everyone: creating equity always entails some risk in exchange for the potential gains. You may not be the entrepreneurial type. In that case, I recommend a disciplined savings plan of the conventional kind.

But if you do have the entrepreneurial urge, think about what equity opportunities are available around you. Is there a company you can work for that gives ownership to its key employees? Would investment real estate be right for you? Could you build a company instead of working for one?

It’s true: you can save your way to being comfortable. But as Donald Trump, Bill Gates and even your local real estate developer can tell you, you can’t save your way to being really, really rich. For that goal, your magic word is “equity.”

Alan MacDonald is an investment advisor who helps high tech entrepreneurs make smart decisions about money. Contact Alan at Alan.Macdonald@RichardsonGMP.com or visit his website at  www.alanmacdonald.ca

Of all the many seductive get-rich-quick strategies out there, until recently one of the biggest particularly in the United States – was “flipping” real estate.

Speculators would buy a house, fix it up, and sell it again for a much better price. The attraction was the high profit versus the expense: for a few thousand dollars in paint and contractor work, the entrepreneur could reap 20% or 30% in profit after the sale. In fact some houses and condos were purchased and never occupied. A few months of waiting and the empty units were sold at hefty profits. As fans of the TLC channel will recognize, my title for this article is borrowed from the popular TV show of that name. But personally, I suspect the show won’t make it to next season: this particular wealth-creation vehicle now seems to have been slammed into reverse. Many highly leveraged speculators in the U.S. appear to be heading for the exit ramps at high speed.

Traditionally, real estate has always been a great way to build wealth. Most of the wealthy people I know can trace a significant portion of their assets back to dabbling in it. Unfortunately for speculators, though, real estate is one of those investments that works best over the long term. But the point about flipping is that it’s a short-term strategy.

At the height of the house-flipping boom, seminars abounded to educate “average Joe” speculators on the art of the transaction. To all appearances, the activity seemed to be risk-free and to offer high returns, so it attracted a lot of players – who often ended up bidding against each other to capture the market jewels in any given community. Those seminars generally ignored the risks of the operation, since “risk” seemed to have permanently left that particular building.

In fact, the house-flipping trend had all the hallmarks of a speculation frenzy. There are certain ingredients required for a good frenzy: the first, of course, is a few years of abnormally high returns. The second is discounting the risks; and the third is the rise of gurus selling workshops on how to cash in on the boom. Such gurus claim to have found the secret to endless wealth (though the cynic might well wonder why anyone who’s found the pot of gold would feel the need to tell everyone else its location).

When dazzled by the prospect of high returns, a good rule of thumb is to play the game of “Find the Risk.” There are no free lunches in the investment world; every increase in your return (over the basic risk-free rate of treasury bills) means accepting some degree of risk. As with any equity asset, the risks of house flipping are real – and they can quickly turn against you.

What about the risks of other kinds of investments? Some hedge funds are a good example of investments that appear to offer high returns with little risk. The value of the shares stays steady, and the funds seem to push out 5%, 10%, even 30% in a good year.

But hedge funds should make some investors a little nervous, because it’s hard to get a good look “under the hood.” The normal routine is for you to send in your capital, and the manager will implement the usual strategy of that particular hedge fund. The strategy varies: it might be long/short equity plays, short bonds of one currency in favour of bonds in another currency, short stock in favour of convertible debentures, and so forth.

In fact, there are hundreds, if not thousands, of hedge fund strategies. Some of these strategies actually are safe, but many others just look that way. You need to know which is which, because otherwise you’re like a man who’s walking in front a steamroller picking up nickels. It feels perfectly safe – until you look over your shoulder.

The bottom line is that to combine high returns and reliability, you need to think long-term. The best strategies are very rarely the “flavour of the day” speculation. When some investment activity is all hyped up, and everyone is doing it – take my advice, and give it a pass.

Of course, that’s boring rather than exciting; and you’ll need to wait a while before your sensible investment bears fruit. But rushing to harvest has never been the best financial strategy.