Why invest at all?

Cash slowly loses buying power to inflation. Investing is how your money can grow faster than prices rise.

Saving and investing are different jobs

Saving means keeping money safe and easy to reach, usually in a bank account. Investing means buying things that can grow in value over time, like shares of companies, and accepting that their value will go up and down along the way.

You need both. Savings cover the near future: next month's bills, a surprise repair, a trip you're planning. Investments are for goals that are years away, where there's time to ride out the bumps.

The quiet problem with cash: inflation

Inflation is the general rise in prices over time. When prices go up, each dollar buys a little less. In the US, inflation has averaged very roughly 2–3% a year over long periods, though some years are much higher.

A savings account that pays interest softens this, but after inflation it often only just keeps pace. To actually grow buying power over decades, most people need some of their money invested.

How investments grow: compounding

When an investment earns a return, that return can earn its own return the following year. This snowball effect is called compounding. It starts slowly and speeds up over time, which is why time matters more than almost anything else.

A handy shortcut is the Rule of 72: divide 72 by a yearly return to estimate how many years it takes money to double. At 6% a year, that's about 12 years. Try different rates below.

Quick lesson

The Rule of 72

Divide 72 by a yearly return to estimate how many years it takes money to double.

12years to double at 6%

72 ÷ 6 = 12.0. The exact figure with yearly compounding is 11.9 years, so the shortcut is close.

Key takeaways

Savings are for the near future; investments are for goals that are years away.
Inflation slowly shrinks what cash can buy, so money that sits still falls behind.
Compounding means returns earn their own returns, and it needs time to work.

Key terms

Compound interest: Interest earned on both the original amount and on interest already earned.
Inflation: The general rise in prices over time, which reduces what a given amount of money can buy.
Rule of 72: A shortcut for doubling time: divide 72 by the yearly return. At 6%, money roughly doubles in 12 years.

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