Lesson 79: Theres a difference between saving and investing

Published 3:13 pm Thursday, June 24, 2010

Okay. Lets say youve decided that you need to start saving right away. What do you do with the money you save? You invest it. Its not hard to do, and you dont have to be rich to start. Exactly what is investing, and why would you invest money rather than just keep it in a bank?

In order to answer these questions, it helps to keep in mind that in money matters, as in all things, there is a balancein the case of saving and investing, the balance is between risk and reward. If you want a higher return, you have to be willing to take more risk with your money. If youre unwilling to take risk, you must be willing to settle for a lower return.

Bank accounts have one great advantage and one potential drawback. The advantage is that bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC), which is a United States government corporation. In other words, your bank accounts are guaranteed by the full faith and credit of the federal government. (There is a limit of $100,000 per depositor per bank.)

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The disadvantage is that, because theres not much risk of loss, theres also very little reward. Generally, the rate of interest paid by FDIC-backed banks barely keeps pace with the rate of inflation, and sometimes it doesnt even do that. So if you want the spending power represented by your savings to increase, youll need a higher rate of return.

Thats where investing comes in. When you invest, you put your money at greater risk in the hope of earning a higher return. Theres a spectrum of risk/reward options, from very low risk (where you must expect a very limited reward) to very high risk (where you can hope for a great reward but must be willing to lose your entire investment if it doesnt work out as planned).

For most people, a good way to start is to use a moderately risky, well-balanced mutual fund. Dont know what a mutual fund is? Then youll need more information before youre ready to actually invest money. You may want to check out my book, Low-Stress Investing (available at The Bookshelf and on Amazon.com). You can also visit investing websites. Some good ones are www.vanguard.com, www.fidelity.com, www.troweprice.com, and www.paxworld.com.

Excerpted from The Graduates Book of Practical Wisdom: 99 Lessons They Cant Teach in School by C. Andrew Millard, published by Morgan James Publishing, available in bookstores and online. &opy; 2008 by C. Andrew Millard; all rights reserved. For more information visit www.wisegraduate.com.