Saving and investing.
Definition
Saving is setting aside income for future use, typically in low-risk accounts like savings accounts. Investing involves using money to purchase assets like stocks, bonds, or real estate with the expectation of earning a return, which carries greater risk but potentially greater reward.
Examples
Real-world.
- 1 A savings account at a bank earns a small, guaranteed interest rate with FDIC insurance up to $250,000
- 2 Buying shares of stock in a company like Apple means owning a small piece of that company
- 3 A 401(k) retirement plan allows workers to invest pre-tax income in diversified funds
Key Fact
The Rule of 72: divide 72 by the annual interest rate to estimate how many years it takes for an investment to double.