Putting Your Money to Work

You can opt-out at any time.

Please refer to our privacy policy for contact information.

Investing is about taking an active role in putting your money to work for you, rather than letting it sit in a savings account.

Investing is consistent with the personal finance philosophy of managing your money rather than your money managing you. Your expectations should be high, but realistic given your time frame and risk tolerance.

Make Your Money Work Harder

There is a role in your personal financial life for savings accounts, whether it is a bank certificate of deposit or a money market fund. These are places to park cash you may need in the near future.

However, they are not the best places to achieve the level of return that will turn your small nest egg into a bigger nest egg. To achieve that goal, you need to look at investments that offer the potential for much higher returns. We can define investing, then, as the active pursuit of high returns over time consistent with your risk tolerance.

This definition illuminates several key components of investing:

• Active nature
• High returns
• Time involved
• Risk tolerance

These four ingredients all work together to make investing a step above saving in your personal financial strategy. Notice, at this point, we are not talking about any particular investment product, but the process of investing itself.

Active Nature

Investing differs from saving in that it is active as opposed to passive. This doesn’t mean you must become a stock market wizard buying and selling all day. What it means is that you put your money to work directly or indirectly in investments that in some manner add value. That added value increases the worth of your investment.

For example, you invest $25,000 in a business in your community in exchange for part ownership. The business uses the money to buy a new piece of equipment that lets it expand the product line. The business grows and profits increase. Five years later, you sell your interest in the business for $75,000.

Your investment has tripled in five years-not a bad return. The point is that your money provided the means to add value to the company’s worth, and that added value was reflected back to you when you sold your interest in the business.

Generally, when you put your money in savings accounts there is no opportunity for you to participate in any added value beyond the small percentage interest the account pays.

High Returns

Investing implies the potential for higher returns than you could earn through savings accounts. If the potential for higher returns does not exist, then there is no reason to consider investing over savings, which is typically a much safer way to earn some small return.

How high of a potential return should investing offer? That question depends on the product, the amount of risk involved, and the time span of the investment-all topics covered throughout the rest of this section.

Investment schemes that promise high returns with little or no risk aren’t being honest. There are no free lunches in the investment world. The people who build fortunes investing do so over time, not by putting their money into crackpot schemes.

Time Involved

This is one area saving and investing have in common. The longer your perspective on most investments, the greater your chances for success. The miracle of compounding and compound growth works for investing, as well as saving.

In any one year, the stock market may be up or down, but taken over its history, including the years of the Great Depression, stocks on the average have returned nearly 11 percent annually. That doesn’t mean it will do so in any one year and it doesn’t mean any investment you make will earn that return.

There is a direct relationship between your risk and the amount of time you hold an investment. Usually, the longer you hold an investment, the lower your risk.

Risk Tolerance

Risk tolerance is your ability to handle the risk associated with investing. Some people are fine with their investments bouncing up and down, so they are willing to take on more risky products. Others worry if they see the value of their investments dropping ever so slightly. Neither investor is wrong.

What is important to you is finding your comfort zone with investing and sticking with it. Don’t step too far away from that spot or you will find yourself lying awake at night with worry.

Don’t let well-meaning friends or relatives talk you into an investment that makes you uncomfortable. There are numerous opportunities and more every day that will feel right for you-so don’t be badgered into a situation that causes you to lose sleep.