investing for the long term

Posted : April 11, 2018
Last Updated : August 10, 2022

investing for the long term

When it comes to handling your money, there are two important words you need to know: saving and investing. Here's what they mean and how to make the most of them:

What Are Savings?

If your goal is to keep your money safe and have it available when you need it, opening a savings account is the way to go.

When you put money into a savings account at the bank, it will generally gain a small amount of interest. Most savings accounts offer a low to moderate return on your money, but your earnings are guaranteed, meaning there's no risk of losing the funds in your savings account. 

Why Do You Need Emergency Savings?

Your savings are liquid, meaning you can access them quickly if you need them. It's good to have emergency savings in case of a large, unexpected expense, like car trouble or a broken phone. 

What Is Investing?

If your goal is to build wealth – and you are willing to leave your money alone for several years at a time - then investing may be a wise choice for you.

When you invest your money, you put it to work by backing certain assets expected to grow in value over time. You can see a mathematical explosion, called compound interest, happen when you invest.

Simply put, compound interest means that as your investments grow over time, they earn dividends both on the money you originally invested, your principal, and also on additional money you've earned since then, your interest. 

Ideally, when you invest, your money will grow and compound over time. Keep in mind that investing does come with risk, so you may experience some losses. But by making wise investments with the help of a financial advisor, you can make long-term financial gains.

What to Know Before Investing

Unlike savings, most investments are not liquid, meaning if you need emergency cash, they won't be much help. That's why it's important to invest money you don't expect to need in the near term.

Here's how to plan ahead before you invest:

  • Pay off debt before investing, as debt can also compound over time.
  • When you're ready to invest, determine how much money you can afford to set aside.
  • Make a plan for how much you'll contribute monthly to your investments, and watch your earnings grow over time.

How Does Compound Interest Work?

Compound interest is a powerful tool to help grow your money. Here's an example:

If you deposit $1,000 into a savings account with a 2% rate of return compounded monthly, you could expect to earn $106 over the course of five years.

However, if you invested that same amount into a portfolio with a 6% rate of return compounded monthly, you would earn $348.85 after five years.

Keep in mind that investing does come with risk, so you aren't guaranteed a return. But the above example illustrates how powerful investing can be if it's done wisely.

Final Thought

Saving and investing are terrific tools for college students looking to lay a solid financial foundation for the future. Just be sure to budget, save and invest with care to make the most of your money in the long run.

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