There is saving and then there is investing. The big differences between them are what type of account you use to hold your money and how long it will be there.
Saving is what you do with money you will need to pay for short term goals (goals that occur in the next five or so years). This money should be placed in an account that’s easily accessible and safe such as a savings account or a certificate of deposit.
Investing is what you do with money you’ll need for long-term goals such as retirement. In this case, you should make growth of your money the number one priority. Growth of your money is important because it needs to outpace inflation, which erodes the purchasing power of money. Let’s look at an example. If you put $10 under your mattress today and the inflation rate is 2%, this time next year that money will only buy $9.80 worth of goods and services compared to last year. Look at the chart below to better understand how decades of inflation can affect your savings.
In order to outpace inflation, you must invest your money in the stock market. In most retirement programs, mutual funds are the investment vehicle of choice. A mutual fund is a group of different investments packaged into a single “basket.” These baskets may invest in individual stock, bonds, cash type investments or combination of all three. Mutual Funds have different names depending upon the investment company that offers them as well as their strategy. Look for the mutual fund’s informational page describing its strategy, how it has performed over time as well as its fees. Pay particular attention to the expense ratio (the cost you pay to participate in the mutual fund as a percentage of how much of the fund that you own) as you decide which mutual funds are right for you.
It’s never too early to get started. Even if you only have a little money to invest, get started now because compound interest will begin to work its magic. Compound interest is like a runaway snowball of money that grows larger and larger as it rolls along. The sooner you get that snowball rolling the better.