Why should you bother investing at all when your neighborhood bank is a nice, safe place to put your money? The answer: inflation and taxes. If your savings, after taxes, doesn't grow faster than the cost of living, its purchasing power will steadily erode. Put another way, if you don't find a way to put your money to work for you effectively, you'll never be able to reach the financial goals you cherish. In short, after you take care of your emergency savings fund, you need to become an investor. The following example, which doesn't even account for the take of taxes, will show you why:
Had your grandmother stashed $90 under her mattress 50 years ago, (the price of a decent-quality, three-piece bedroom set in 1945) that money today would buy little more than a set of sheets. If she had invested that $90 in a bank savings account that kept even with inflation, she could still afford that roomful of furniture. But if she had put her 90 bucks in the stock market, it would have grown to more than $25,000 today: enough not only for that bedroom set, but for a down payment on a second home to put it in.
If that story doesn't impress you, here's a scarier one: Investing wisely can mean the difference between retiring to a cushy house on the 18th green or retiring to a state-run oldsters' home. Saving, while extremely important, is essentially just putting money away for safekeeping. Investing, by contrast, is using your money to produce more money.
Are you thinking that you need a lot of money to invest? You don't. Many equity mutual funds, which pool money from small investors and use it to buy stocks, accept initial investments as low as $500 or even $250. More than 140 fund families let you in with $100 or less. Most funds also let you invest as little as $50 or $100 a month. You can also see what it's like to be a stock investor buy purchasing a single share of a company for, say, $30.
If you haven't invested a dime in your life, you're not alone. Millions of Americans don't own any stocks or mutual funds. Some of them have just decided that they don't know enough to invest intelligently. Others think that investing is too scary and worry about the possibility that they'll lose money. Still others think that investing in stocks and mutual funds is no different from playing the craps tables. The truth is, it isn't hard to learn how to invest, putting money into stocks or stock funds isn't scary, and by investing defensively, you can protect yourself from losing money. As for the craps analogy, it's flat wrong. Winning at dice means having good luck. Winning as an investor means using your brains.
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