| In simple economies, there is little | | | | Is storing money safely, such as in a bank or |
| distinction between savings and investments. | | | | money market account, for short-term needs |
| | | | such as upcoming expenses or emergencies. |
| One saves by reducing present consumption, | | | | |
| while he invests in the hope of increasing | | | | Typically, you earn a low, fixed rate of |
| future consumption. | | | | return and can withdraw your money easily. |
| | | | |
| Therefore, a fisherman who spares a fish for | | | | Investing: |
| the next catch reduces his present | | | | |
| consumption in the hope of increasing it in | | | | Is taking a risk with a portion of your |
| the future. | | | | savings such as by buying stocks or bonds, in |
| | | | hopes of realizing higher long-term returns. |
| Most of the people probably have savings | | | | |
| accounts with ATMs to access their | | | | Unlike bank savings, stocks and bonds over |
| hard-earned cash and be able to store away | | | | the long term have returned enough to outpace |
| any extra cash in a place a little safer than | | | | inflation, but they also decline in value |
| a mattress. A few of you may even have some | | | | from time to time. |
| stocks or bonds. | | | | |
| | | | The rate of returns and risk for savings are |
| Let me explain why while a savings account in | | | | often lower than for other forms of |
| the bank may seem like a safer place than the | | | | investment. |
| mattress to store your money, in the | | | | |
| long-term it is a losing proposition! | | | | Return is the income from an investment. |
| | | | |
| If you open a savings account at the bank, | | | | Risk is the uncertainty that you will receive |
| they will pay you interest on your savings. | | | | an expected return and preservation of |
| So you think that your savings are guaranteed | | | | capital. |
| to grow and that makes you feel extremely | | | | |
| good! | | | | Savings are also usually more liquid. That |
| | | | is, you may quickly and easily convert your |
| But wait until you see what inflation will do | | | | investment to cash. |
| to your investment in the long-term! | | | | |
| | | | The decision about which investment to choose |
| The bank may pay you 5 percent interest a | | | | is influenced by factors such as yield, risk, |
| year on your money, if inflation is at 4 | | | | and liquidity. |
| percent though, your investment is only | | | | |
| growing at a mere 1 percent annually. | | | | Investments may produce current income while |
| | | | you own the investment through the payment of |
| Saving and investing are often used | | | | interest, dividends or rent payments. |
| interchangeably, but they are quite | | | | |
| different! | | | | When you sell an investment for more than its |
| | | | purchase price, the profit is known as a |
| Saving: | | | | capital gain, also called growth or capital |
| | | | appreciation. |