Why invest?
If you have a retirement plan or college savings plan, you are an investor. If you own stocks, bonds, mutual funds, or exchange-traded funds, you are an investor. Even a certificate of deposit at your bank can be considered a form of investing.
The main difference between investing and the other financial topics on this site – banking, credit cards, and insurance – is that with the others, you place your money in someone else’s hands and they use it as they see fit. Your job is to find the right bank, credit card, or insurance plan that will use the money in a way you agree with.
With investing, YOU are in charge of what happens to your money. You can pick and choose from any number of investing options – not all of which are on the stock market -- so it is important to understand what investing is and how it works.
Reasons to invest
The reason most people invest is to meet a goal. This could be a short- or medium-term goal such as going on a trip or buying a house, or a long-term goal such as funding your retirement or a child’s college education.
Investing can be risky, especially if you don’t understand how it works. Nothing says you have to invest. You could simply save money in a bank or credit union until you have enough to meet your goal.
But meeting your goal is a lot easier with investing in stocks and bonds. Why? Because you are letting your money do some of the heavy lifting.
Investing even a small amount on a regular basis helps you reach your goals faster by putting your money to work for you. How? The secret is compound interest.
Compound interest means that you earn interest not just on the original investment, called the principal, but also on the interest your principal generates. That interest is added back to the principal each month to earn even more interest.
A compound interest calculator, such as the one on investor.gov illustrated on the upper right, can demonstrate the point.
Say you start with an initial amount of $25, and you contribute $25 per month or $300 per year for 30 years. In a bank account with a low interest rate, you end up with a total of $9000. But with the stock market's average return of 10% over that time, you end up with $57,000!
When to invest
Many people believe you need a lot of money to start investing, but actually the opposite is true. The best time to start investing is when you are young and have time for compound interest to do its work. Even a small amount each month really adds up.
However, there are a few things to keep in mind:
Start with your employer’s retirement plan. If you are lucky enough to work for an employer that offers a match for contributions a 401(k), 503(b), or pension plan, use it! This is free money that can start earning compound interest for you over the long haul. At least contribute enough to get the employer match -– and more if you can manage it.
Pay off high-interest credit card debt. Americans carry a mountain of credit card debt – over $1.2 trillion at the end of 2024. If you are having trouble paying your credit card debt, your options include credit card hardship programs, debt consolidation, and credit counseling. Organizations like the nonprofit Consumer Credit Counseling Service can help.
Set aside emergency savings. Put aside three to six months worth of expenses in an emergency fund to draw from if you lose your job or for unexpected expenses like car repairs or medical bills. You won’t need to live lavishly if that happens, but you do need enough to cover basic expenses.
Next: Types of investing
“Many people believe you need a lot of money to start investing, but actually the opposite is true. The best time to start investing is when you are young and have time for compound interest to do its work. Even a small amount each month really adds up.”