Investing Versus Saving

There are only two kinds of investments available for you: debt or equity. Everything else is derivative of these two. Learning to invest will help you reach your goals successfully.

Our financial lives are more complicated than our mother's or grandmothers' were because we need to know about this investing stuff, and we need to be able to teach our daughters and sons. So you'd like to be a millionaire, but you don't think you could survive on an island or the lottery ticket you bought last week didn't win. What can you do next?

More millionaires have been created by simply spending less than they earn and learning to invest the rest. Any time you have a dollar in your pocket, you have a choice: spend it or save it.

 

There are only two kinds of investments available for you: debt or equity. Everything else is derivative of these two. When you purchase a CD from your local bank or a Treasury bill from the U.S. Treasury, you are in essence loaning your money to the bank or the U.S. Treasury for them to use. The bank may make the money available for someone else to buy a car or a house; the Treasury may use it to pay down debt.

They promise you that they will pay you a fixed rate of return (interest) and tell you when you will be repaid in the future. They will also guarantee you the return of your entire principal. It sounds like a sweet deal; Your money earns interest, and you are guaranteed to get back. But because it so safe, the bank and the Feds know they can pay you the going interest rate, and you'll be very happy because you are looking for safety here.

When you participate in the equity market, you choose to buy something with your money. Equity is ownership, and you hope that whatever you buy will appreciate in value over time so you will be able to sell it for a profit. No one will guarantee a rate of return for your money, and no one will guarantee that you will get your money back. You have an equity position when you purchase stocks, real estate, mutual funds, or collectibles.

Equity investments may also produce income such as dividends or rental income, but investors look to them primarily for growth. Because there is no guarantee here, investors expect to be rewarded for the risk they are willing to take. That reward is a higher return than they would get if they bought a CD.