Smart investing tips for the new year and beyond.
This post is the third in our five-part series about taking charge of your finances in 2010. We talked about the importance of setting financial goals and saving money in the first two parts of the series. Today’s topic is about where to invest your money.
What is the Difference Between Saving and Investing?
Before we get started, I want to make a distinction between the terms saving and investing. We tend to use those words interchangeably, but they’re really not the same thing. The difference has to do with taking financial risk.
Saving is putting money aside without exposing it to any risk (or at least very little)--like in a savings account, a money market deposit account, or a certificate of deposit (CD) in an FDIC-insured institution.
Investing is committing money to an endeavor or account with the expectation that you’ll make a certain amount of profit or income. The risk is that you’ll receive less than what you expect. Or worse yet, there’s a possibility that you could lose your entire investment. Increased risk generally goes along with the potential to make more money.
Why You Need to Take Investment Risk
Therefore, taking calculated risk is an important part of your financial life. Without it, your money probably won’t grow fast enough to achieve your goals. You can keep money safe and cozy in a low-interest savings account, but that stunts its potential and doesn’t give it the opportunity to swell into a nest egg large enough to meet your long-term goals.
The quick and dirty tip for investing is to expose your money to just enough risk to accomplish your goals. The money you’ll need for small, short-term needs is well-suited for safe places like a savings account or CD. But the money that you’re counting on to grow and multiply over the long-term--like for your retirement--needs to get friendly with some amount of risk that you can live with.
Consider this: Many financial advisors believe that not taking enough investment risk might actually be the riskiest move of all! That’s because you could fall short of your goals or run out of money during retirement. Whether you avoid risk intentionally or have simply been procrastinating investing, the result could be devastating to your financial future.