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