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The Basics of Investing
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You don't want to save for retirement. Instead you want to invest for retirement.
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The difference isn't just one of words. When you save, all you're doing is piling up your money. But when you invest, you are positioning your money for growth.
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An investment is something you buy either because it will pay you money on a regular basis (income) or because you hope it will go up in value (capital appreciation). You also want to invest to ensure that your assets are at least keeping up with inflation. Inflation slowly eats away at the value of your savings because over time you have to pay more for the same goods and services. Inflation is one of the main reasons a gallon of milk cost $3.50 today whereas in 1960 it cost just $0.49.
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The three main types of investments are stocks, bonds, and cash. A stock represents a piece of ownership in a company, while a bond is a loan you make to a company or government in return for interest payments. You buy stocks hoping they'll go up in price, while bonds are used to provide income. Think of cash not as the wad of bills in your wallet or under your mattress but as a money-market account that nets you a modest interest rate.
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You can invest in any of these options directly or by purchasing mutual funds, which pool together money from thousands of investors to buy stocks, bonds, and cash. Mutual funds are the most frequently offered investment option in 401(k) and other defined-contribution plans.
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No matter what you're investing in, you're hoping for one thing: more money. The amount of money your fund makes for you is called its total return, which is measured in percentages. If your fund has a total return of 10%, it made $10 for every $100 you invested. Of course, your investment may lose you money, either for a short period of time before bouncing back, or sometimes even permanently. That's why investing involves risk.
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Keep in mind that the easiest way to maximize the value of your retirement fund isn't to find the hottest stock or the best mutual fund. Instead, it's to start investing as soon as you can. The earlier you begin, the more time your money has to grow.
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