What Does Investing Mean? – Investment U

The concept of investing is something we start hearing about at an early age. But what does investing mean? Most people understand it at a surface level: saving money now so you can access it in the future. The reality is that investing is more complexespecially when you consider compound interest, different investment vehicles and different styles of investing. To truly understand investing, you need to do more than scratch the surface.

Whether youre a fresh-out-of-school 20-something opening your first 401(k) or a worker with decades of savings in an index fund, investing is important. Knowledge is power when it comes to capitalizing on your investments. Heres what you need to know about investing, in a nutshell.

Investing and saving are two different things. Theres often a lot of confusion around these two terms, and its important to make the distinction between them. While investing involves saving, theres a fundamental difference between them. Saving refers to principal; investing refers to gains on principal. Simply put: investing is about making money with your money.

Consider a simple example. If Brad puts $1,000 in his bank account each month, hes saving. That bank account only has a 0.10% interest rate, and inflation ranges between 1-3% during any given year. That means Brad is actually losing money by saving it! Conversely, if he were to invest it at a rate of 8% per year, hes making money year over year. In fact, if his investment compounds annually, hes going to make a lot of money over time! Check out our investment calculator to see what compound interest looks like in action.

When you invest, youre letting someone else borrow your money to make money, and youre earning interest that makes you money. Its part of the cycle of economics. To save is to stagnate due to inflation; to invest is to profit through appreciation.

Theres a wide array of investment vehicles out there that can lead to wealth accumulation. Here are some of the most popular:

Within each of these investment vehicles are numerous choices investors can make to obtain wealth. Consider investigating them further as you diversify your portfolio.

There are two approaches to investing: active and passive. Active investors prefer to be hands-on, making adjustments to their portfolio by reallocating their investments. This takes work, and a working knowledge of different investment strategies. It also requires a strong knowledge of tax and accounting, to ensure youre making sound investment choices.

Passive investing is a set it and forget it style of investing. These investors prefer to contribute money regularly and let automated systems do the work for them. It might mean buying index funds that track the market or letting a dividend portfolio compound automatically. In any case, passive investors dont change their investing habits or thesis. Theyre in it for the long haul, and will stay the course.

Its important to note the difference between investing and speculating. Speculating is a short-term mindset: the stock will go up next week, so Ill buy today and sell when it rises. Investing is traditionally a long-term mindset: the stock price will go up and down, but will generally go up over time.

Speculators open themselves to more risk by trying to time the market. Investors benefit from time, since theyre relying on compounding and macro growth. Theres a reason the stoic investor Warren Buffet famously says, Time in the market beats market timing every time.

Putting money in a savings account for 45 years isnt an investment. Investments involve making your money work for you! Whether its compound interest earned through the stock market or rental income from an investment property, investments add up over time.

And these investment can help you build wealth. Sign up for the Liberty Through Wealth e-letter below to get started on your journey to financial independence.

Once you understand the fundamental concept of investing, youll be able to make smarter decisions about how to invest your money. Stocks vs. property. Passive vs. active. Growth vs. dividend. Each person will make different choices depending on their level of risk and comfort with certain investments. What matters most is your understanding of the basic principle behind them.

Always ask yourself, what does investing mean? before making investment decisions. Itll drive you to save your money in a way that compounds your wealth.

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What Does Investing Mean? - Investment U