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