Saving is Not Investing
Don’t confuse investing with saving. Saving is setting money aside, usually in a bank savings account or in a certificate of deposit. The interest may be relatively low, and inflation can eat away at it if you leave it there long-term.
Nevertheless, saving is the first step to your financial well-being. Setting aside a percentage of your income regularly is the smart way to get on your feet and stay there. Smart savers put money aside for emergencies or for a major purchase or a vacation.
Building up your savings is also a path to becoming an investor. Some investment vehicles (for example, mututal funds) require that you have a minimum amount for the initial purchase, and a savings account can help you get there.
Investing gives you the potential of higher long-term returns by taking some risk with your money. Investing usually involves buying stocks, bonds, mutual funds, or real estate.
Keep in mind that the value of an investment may fluctuate. You may experience losses as well as profits. Historically, investment returns have outperformed interest returns on savings. There are ways to invest that will let you sleep at night, regardless of your tolerance for risk.
For a quick look at how interest rates impact growth, see our Savings Rates Calculator.