People save and invest for different reasons, such as to fund their retirement or another future event. Whatever the reason, the objective is always to maximize the potential returns on their money.

Nowadays, investments are the foundation of our future financial level. Bad investments can bring us negative turnovers and therefore decrease our future possibilities.

The Difference Between Saving and Investing

Even though the words “saving” and “investing” are often used interchangeably, there are differences between the two.

Saving provides funds for emergencies and for making specific purchases in the relatively near future (usually three years or less). Safety of the principal and liquidity of the funds (ease of converting to cash) are important aspects of savings dollars. Because of these characteristics, savings dollars generally yield a low rate of return and do not maintain purchasing power.

Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. Investing involves risk (of loss of principal) and is to be considered only after you have adequate savings.

Investment Return

Total return is the profit (or loss) on an investment. It is a combination of current income (cash received from interest, dividends, etc.) and capital gains or losses (the change in value of the investment between the time you bought and sold it). The published rate of return for a selected investment is usually expressed as a percentage of the current price on an annual basis. However, the real rate of return is the rate of return earned after inflation, which is further reduced by income taxes and transaction costs.

Risk

ALL investments involve some risk because the future value of an investment is never certain. Risk, simply stated, is the possibility that the ACTUAL return on an investment will vary from the EXPECTED return or that the initial principal will decline in value. Risk implies the possibility of loss on your investment.

Factors which affect the risk level of an investment include:

• Inflation
• Business failure
• Changes in the economy
• Interest rate changes

The Risk / Rate-Of-Return Relationship

Generally speaking, risk and rate of return are directly related. As the risk level of an investment increases, the potential return usually increases as well. The pyramid of investment risk illustrates the risk and return associated with various types of investment options. As investors move up the pyramid, they incur a greater risk of loss of principal along with the potential for higher returns.

Rule of 72

If you want to know how long it will take to double your money, take the number 72 and divide that number by the interest rate you are getting. So if you deposit $3,000 into an account with a 2% interest rate, 72 ÷ 2 is 36. So in 36 years you will have $6,000.

If you have an interest rate of 12%, you will make $6,000 in six years. The higher the interest, the quicker it is.

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