12.5 Investing
Investing is like planting seeds that can grow into bigger plants over time. While saving focuses on keeping your money safe (like storing seeds in a jar), investing aims to help your money grow by putting it to work in different places, such as buying shares of a company or lending money to a government.
Key Investment Terms
-
- Interest: When you borrow or lend money to someone, the cost or profit is called interest.
- Compound Interest: This is when interest grows on the original amount of money plus any interest earned before, like a snowball getting bigger as it rolls downhill.
Try this online compound interest calculator to better understand how compound interest works.
Why Invest?
- Compound Growth: Reinvested gains can lead to exponential growth over the long term.
- Wealth Building: Helps you outpace inflation so your money doesn’t lose value over time.
What to Invest In?
- Stocks: These are small parts of a company you can buy. If the company does well, your piece becomes more valuable.
- Bonds: This is like lending money to a company or the government with a set term and interest rate. They promise to pay you back with some extra interest later.
- Mutual Funds: Your money joins other people’s money and is managed by a professional who buys a variety of stocks, bonds, or other assets.
- Exchange-Traded Funds (ETFs): Similar to mutual funds, they usually track a market index (like a “basket” of different company stocks) and usually have lower fees.
Risk
All investments carry some level of risk—the possibility that you might lose money or see lower-than-expected returns.
Before diving into any investment, it’s important to understand your own comfort with uncertainty and potential losses. This is commonly referred to as risk tolerance. If you panic at every market dip, you may prefer relatively stable options like certain bonds or diversified funds. If you can ride out more volatility, you might choose higher-risk, higher-reward investments such as certain stocks.
By knowing your risk tolerance beforehand, you can align your decisions with both your financial goals and your emotional well-being.
