The Advantages of Saving or Investing
Original post by Justin Johnson of Demand Media
Saving money is advantageous because it provides people the opportunity to earn interest while keeping their money safe. Investing money can be risky, but it offers higher returns than bank savings accounts and can help people build wealth over the long-term.
Savings accounts and other savings vehicles such as certificates of deposit are advantageous because they provide the account holder with the opportunity to earn interest on his savings while having little to no risk. While the interest rates are typically low, the amount earned in interest is incentive for saving. Savings accounts and money market accounts are designed to provide the account holder with anytime access to his money. Certificates of deposit, or CDs, impose a penalty if the funds are withdrawn before the expiration date of the certificate, but generally have higher interest rates than savings accounts.
Bank accounts are protected by the Federal Deposit Insurance Corp., or FDIC. The FDIC is an independent governmental agency that provides deposit insurance on bank accounts in the United States. The FDIC provides $250,000 of deposit insurance for each depositor at each bank, provided the bank is insured by the FDIC.
The advantage of investing is the opportunity it provides for building wealth over the long-term. Diversification is a risk-minimizing concept that spreads money between different types of investments, which can offset losses in one investment type with gains in another. Traditional investments include stocks, mutual funds and bonds. These are securities that are issued by companies and governmental units for the purpose of raising capital. Real estate is another effective type of investment, as it is generally considered to be safe and conservative. Some people invest in collectible items, such as rare sports memorabilia and other items such as coins and stamps. Investing money in stocks, bonds and real estate, however, does come with risk and is not guaranteed a return. Because of this risk, the returns on these investments are typically higher than with savings accounts.
Historical Investment Returns
The historical return of stock markets in the U.S. makes them an attractive place to invest. Personal finance coach Dave Ramsey recommends that investors place their money in mutual funds, which are pooled investments that typically buy stocks and bonds. The historical return of the S&P 500 Index, a broad measure of stock market performance, is nearly 12 percent as of 2010. Ramsey states that while the market is volatile in the short-term, it has almost always settled near the 12 percent threshold over time.
- U.S. Department of Commerce, Bureau of Economic Analysis: Personal Income and Outlays -- June 2011
- Bankrate: Advantages of Savings Accounts
- Federal Deposit Insurance Corporation: Who is the FDIC?
- 101 Life Planning: What are the Different Types of Investments?
- Dave Ramsey: The 12% Reality
- Securities and Exchange Commission: Beginners' Guide to Asset Allocation
About the Author
Based in Somerset, Ohio, Justin Johnson has been writing since 1998. He was a finalist for the 1998 Muskingum County (Ohio) Bar Association Law Day Essay Contest and has also written academic papers on business, finance and political topics. He has a Bachelor of Science in business management from Pensacola Christian College.
- Jupiterimages/BananaStock/Getty Images