Saving money is an important part of every financial planFinancial plan Your financial plan should cover every aspect of your finances: saving and investing, paying down debt, insurance, taxes, retirement planning and estate planning.+ read full definition. Putting money aside each month will help you prepare for emergencies, stay out of debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition and reach your financial goals.
But setting money aside and saving only gets you so far. To build your savings faster, you may consider investing. This could be in short-term, lower-risk investments, or long-term, higher-risk investments.
Here are some reasons people investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition:
- To harness the power of compound interest – compoundingCompounding A way to grow your money faster. Instead of spending the money you make investing, you reinvest it so it can grow.+ read full definition allows you to earn more by re-investing the money you earn on your investments. Learn more about growing your savings with compound interest.
- To meet savings goals faster – stashing money under your mattress may help you save, but your money isn’t working for you, and may actually be losing value due to inflation. Saving and earning interest can help you meet your goals faster.
- To save for long-termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition goals – the longer your time horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition (the amount of time before you need your money), the less concerned you’ll be over short-term market volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition. See how time horizon affects risk and return.
Learn more about how to get started.
Time horizon, diversification and markets
Not sure how investing works, or curious to see historical market performance? Use our suite of investing charts and graphics on topics like bull and bear markets, market crashes, diversificationDiversification A way of spreading investment risk by by choosing a mix of investments. The idea is that some investments will do well at times when others are not.+ read full definition, rebalancing and risk. Learn more with our interactive investing charts.
Is investing right for everyone?
Investing isn’t for everyone – or it may not be right for you at this moment. Before you start investing, define your financial goals. For example, if your main financial goal is to pay off debt, you may receive a bigger payoff by paying off your debt – and saving on interest payments – than you would investing. Use the Pay Down Debt or Invest Calculator to learn more.
Investing may help you reach your financial goals faster – but it comes with risk. Learn about the relationship between risk and return.