We hear about investing and investments on a daily basis, from the news to movies and TV shows to social media. Unfortunately, there is often a lot of confusion about what it means to invest. As a result, millions of people may avoid the concept entirely and stick to a simple savings account. While savings accounts are great for protecting your money, they do little to increase it.
The simple truth? If you want financial security, especially as you approach retirement age, you need to grow your money. Unless you have very high income, your savings won't be enough to fund your retirement. Fortunately, investing is now more user-friendly than ever, thanks to modern technology and convenient sources of information about investments!
The most basic investments are securities, meaning stocks and bonds. A share of stock is a unit of ownership in a corporation. When you own a share of stock, you often receive dividends, or a share of the corporation's profit, every quarter (3-month period). Shares of stock are typically much easier to purchase than bonds, because bonds may cost thousands of dollars. Many stocks can be purchased for less than a hundred dollars per share, and some investing apps allow you to purchase fractional shares, which are fractions of a share. So, even if a share of stock costs $400, you can buy $20 worth and begin investing!
Buying stocks is an easy way to begin investing, and can be done from your smartphone. Instead of having to go through a broker, you can buy and sell shares of stock on your own using the Internet. Ideally, you should buy many different stocks from many different industries to diversify your portfolio. Your portfolio is the entire group of a type of investments, such as a stock portfolio.
A diversified portfolio is likely to be very stable and avoid crashing (losing value rapidly). If your portfolio is not diversified and consists of only a few stocks, those companies could experience crises and see a plunge in value. Having many different stocks reduces the risk that all of those companies could experience problems at the same time!
With a diversified portfolio of stocks, you will enjoy the strong growth of the stock market. As a whole, the stock market tends to grow much faster than the interest rate paid on your savings account at your commercial bank or credit union. According to investing site Motley Fool, the stock market return has averaged 10 percent per year over the past 50 years. Smartasset reveals that the average annual interest on a savings account today is only...0.06 percent!
Not only does this small interest rate not compare to the healthy gains of the stock market, it is actually too small to even maintain the value of your savings. The problem is inflation, or the rise in the price level. Across the board, it is common for prices to rise every year on everything from groceries to new cars to houses. The Bureau of Labor Statistics reveals that inflation typically averages above 2 percent per year...when the economy is growing slowly! When the economy is growing quickly, or when there is stagflation (rising inflation due to problems with supply chains and the cost of energy), the annual inflation rate can be much higher.
Basically, if your money is not gaining at least 2 percent per year, it is actually losing value! Savings accounts are a good place to hold some money for emergencies, when you need liquidity (money that can be spent right away), but any money that is not needed for a possible immediate emergency should be invested to protect - and grow - its value. And, thanks to modern technology, money invested in the stock market is more liquid than it used to be. In an emergency, you can sell stocks and transfer the cash to your checking account in days if necessary.
Now that you know the importance of investing rather than simply saving, spend some time learning about which stocks, mutual funds, and ETFs (Exchange Traded Funds) are right for your portfolio! Happy learning!