Savings And Investing

Your "savings" are usually put into the safest places or products that allow you access to your money at any time. Examples include savings accounts, checking accounts, and certificates of deposit. At some banks and savings and loan associations your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC). But there's a tradeoff for security and ready availability. Your money is paid a low wage as it works for you.


Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to 6 months of their income in savings so that they know it will absolutely be there for them when they need it.

But how "safe" is a savings account if you leave all your money there for a long time, and the interest it earns doesn't keep up with inflation? Let’s say 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, it might only be able to buy half a loaf. That 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.

When you "invest," you have a greater chance of losing your money than when you "save." Unlike FDIC-insured deposits, the money you invest in securities, mutual funds, and other similar investments are not federally insured. You could lose your "principal," which is the amount you've invested. That’s true even if you purchase your investments through a bank. But when you invest, you also have the opportunity to earn more money than when you save.

But what about risk? All investments involve taking on risk. It’s important that you go into any investment in stocks, bonds or mutual funds with a full understanding that you could lose some or all of your money in any one investment. While over the long term the stock market has historically provided around 10% annual returns (closer to 6% or 7% “real” returns when you subtract for the effects of inflation), the long term does sometimes take a rather long, long time to play out. Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level. However, those that kept adding money to the market throughout that time would have done very well for themselves, as the lower cost of stocks in the 1930s made for some hefty gains for those who bought and held over the course of the next twenty years or more.

When you make an investment, you are giving your money to a company or an enterprise, hoping that it will be successful and pay you back with even more money.

Some investments make money, and some don’t. You can potentially make money in an investment if:

1) The company performs better than its competitors.

2) Other investors recognize it’s a good company, so that when it comes time to sell your investment, others want to buy it.

3) The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your stock.

You can lose money if:

1) The company’s competitors are better than it is.

2) Consumers don’t want to buy the company’s products or services.

3) The company’s officers fail at managing the business well, they spend too much money, and their expenses are larger than their profits.

4) Other investors that you would need to sell to think the company’s stock is too expensive given its performance and future outlook.

5) The people running the company are dishonest. They use your money to buy homes, clothes, and vacations, instead of using your money on the business.

6) They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesn’t, or make up fake numbers on their finances to dupe investors.

7) The brokers who sell the company’s stock manipulate the price so that it doesn’t reflect the true value of the company. After they pump up the price, these brokers dump the stock, the price falls, and investors lose their money.

8) For whatever reason, you have to sell your investment when the market is down.

You may want to also read about 529 College Savings Plans

You can also read about Tips For Buying Certificates Of Deposits

Although all information has been written in good faith and reviewed, please email us at help@stockmarketbeginnersguide.com to report any inaccuracies.