investing for the long term

Posted : April 11, 2018
Last Updated : December 16, 2020

investing for the long term

Saving is for the short term; investing is long term. Learn how to explain the difference between saving and investing, describe the impact of inflation, and understand the time value of money.

Saving vs. Investing

When it comes to handling your money, there are two important words you need to know: saving and investing. If your goal is to keep your money safe and have it when you need it, savings is the way to go.

When you put money into a savings account, it will gain a small amount of interest. It won’t grow a lot, but it will grow some. When you save, you are putting your money somewhere for less than five years. This is money you want to be liquid, meaning you are able to get to it quickly when you need it. This money is generally kept safe at a local bank in a savings or money market account.

If your goal is to build wealth – and you are willing to leave your money alone for five years or more – you could see a mathematical explosion (compound interest) happen when you invest. Compound interest helps your investment gain money, but you also have the risk of losing some money. Typically, your money will grow and make more money for you when it is invested. For example, a deposit of $1,000 into a .005% interest rate savings account would only earn $25 after five years (and only $50 at 1%). You aren’t making a lot of money, but you aren’t losing any either. However, if you invested that same amount with an annual 10% interest rate compounded monthly, you would end up with $1,645 after five years. But, you could also lose money, so there is some risk involved.

The Value of Money

The time value of money means that money today is always worth more than money later. This is a basic concept in personal finance. Yes, it sounds weird. Isn’t a $100 bill today worth the same as a $100 bill next year? Technically, yes. But will that $100 buy the same amount of stuff next year as it will today? Probably not, because things will cost more. The time value of money includes a loss of value due to inflation (the increase in price of stuff over time).

Here’s an example of the impact of inflation at an annual 3% rate. Your $100 will only buy $97 worth of stuff next year and then only $94 the next. But, in twenty years, that same $100 would only buy about $40 worth of stuff.

The time value of money also means your money can be worth more when you invest it and gain compound interest. Long-term money goals are for things five years or more into the future. One of those goals could be planning for retirement. That is when investing and the power of compound interest come into play. Many students like to dream about being millionaires, but they think it will never happen. However, retiring a millionaire is a great example of a long-term goal. The good news is that you can retire a millionaire if you will begin investing early.

Final Thought

You can become a millionaire! Just start investing money early and leave it alone for a long time.

Source: Ramsey Solutions
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