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Most of us look forward to a comfortable future. To get there, you’ve got to be smart about using your money to make more money.
We know that putting money in savings helps you make more money over time thanks to interest. It’s predictable and based on an interest rate. However, there are ways to make more money if you’re ready to take risks.
Consider this. You’re here and you want to be here. You have a choice between two options: going around the mountain, which usually takes 5 hours. It’s very predictable. Or going over the mountain, which can shorten the trip to two hours. It may seem like an easy choice. You can get there 3 hours earlier by going over, but there’s a catch. You might get stuck in the snow, which is a risk that can make the trip even longer than going around the mountain.
The best way to deal with risk is to be informed. If you do your homework, like checking the weather reports, you’ll have a better chance of making a smart decision.
Now, of course I’m not talking about getting from town to town, but reaching your financial goals. Having a savings account is predictable. It grows steadily with interest. Investing, on the other hand, can grow your money much faster, but there’s also a chance you could lose some of it.
There are many ways to invest. Let’s say your friend is opening a coffee shop. She needs money to buy the beans and supplies. Because she can’t afford everything, she asks people like you to be investors. You can see that this is a big risk, but you do the research and find that a new coffee shop could do very well.
So, you give her company money and you become an owner in a tiny part of the company. That bit of ownership represents the money you invested. If the coffee shop business is slow, your investment may shrink. But if the coffee shop is successful, your investment could grow with the company. It may take time to see the outcome, but you’ve bet that your money would grow faster in an investment than the modest earnings in a savings account. That’s what makes it risky. It’s hard to know how an investment will do over time.
The same is true for the stock market. When you buy stocks, you’re buying a tiny portion of a large business and betting that the business will do well over time, increasing the value of your investment.
Now, the stock market and private businesses aren’t the only kinds of investing. Let’s say you’d like to invest $500. You find antiques that you believe will be worth more in the future. If you’re right, you may be selling them for $750 in a few years. If you’re wrong they may be worth only $400. By investing you’re taking a risk, and you have to be ready for both outcomes.
Whether it’s a friend’s coffee shop, the stock market, or antiques, the big ideas are the same. Savings accounts are predictable and may be a good choice. But if you’re ready to take the risk that you might lose money, you could put your money into an investment that has the potential for a much bigger payoff.
Investing is serious business, and every investment comes with different risks. Do your homework, and discuss your plans with a financial professional before getting involved. If you plan for the long term, you may find that a comfortable future isn’t too many years away.
What it teaches
This video introduces the potential benefits of investing money in the context of taking risks. It describes multiple types of investing and what they all have in common, including:
- Comparing saving and investing in the context of risk
- Being prepared to lose money
- Examples of investing in business, stock market and antiques
- How to know if investing is right for you
The Explainer Network
Our network of custom video producers can create short, animated videos that make your product or service easier to understand.