Saving and Investing: Making Money Grow
The Two Ways to Make Money
There are basically two ways to make money:
- You work for money. Someone pays you to work for them, or you have your own business.
- Your money works for you. You take your money and you save or invest it.
Your money can work for you in two ways.
Your money earns money. When your money goes to work, it may earn a steady paycheck. Someone pays you to use your money for a period of time. When you get your money back, you get it back plus interest. Alternatively, if you buy stock in a company that pays dividends to shareholders, the company may pay you a portion of its earnings on a regular basis. Your money can make an income, just like you. You can make more money when you and your money work.
You buy something with your money that could increase in value. You become an owner of something that you hope increases in value over time. When you need your money back, you sell it, hoping someone else will pay you more for it. For instance, you buy a piece of land thinking it will increase in value as more businesses or people move into your town. You expect to sell the land in 5, 10, or 20 years when someone will buy it from you for a lot more money than you paid.
Sometimes, your money can do both at the same time—earn a steady paycheck and increase in value.
The Differences Between Saving and Investing
Saving
Your savings are usually put into the safest places, or products, that allow you access to your money at any time. Savings products include savings accounts, checking accounts, and certificates of deposit. Some deposits in these products may be insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration—but there's a tradeoff for security and ready availability. Your money is paid a low wage as it works for you.
After paying off credit cards or other high-interest debt, most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to six months of their income in savings so that they know it will absolutely be there for them when they need it.
Think about this: How "safe" is a savings account if you leave all of your money there for a long time, and the interest it earns doesn't keep up with inflation? What if you save a dollar when it can buy a loaf of bread, but years later when you withdraw that dollar plus the interest you earned on it, it can only buy half a loaf? This is why many people put some of their money in savings, but look to investing so they can earn more over long periods of time, say three years or longer.
Investing
When you invest, you have a greater chance of losing your money than when you save. The money you invest in securities, mutual funds, and other similar investments typically is not federally insured. You could lose your principal—the amount you've invested. However, you also have the opportunity to earn more money.
The Basic Types of Products
| Savings | Investments |
|---|---|
| Savings accounts | Bonds |
| Certificates of deposit | Stocks |
| Checking accounts | Mutual funds |
| Real estate | |
| Commodities (gold, silver, etc.) |
U.S. Securities and Exchange Commission (SEC). (n.d.). Making money grow (pp. 10–12). In Saving and investing: A roadmap to your financial security through saving and investing (SEC Pub. No. 009 [06/11]). Retrieved June 21, 2024, from https://www.sec.gov