Saving is Simply Not Good Enough

October 4, 2010

Most people begin to think about investing their hard-earned dollars when they have a few extra. Almost everyone understands the importance of saving: putting away a little bit each day/week/month until a sum has accumulated for some specific purchase or need which was anticipated, like a new bicycle which a child might save for, or a college education that parents will save for their child.

The problem with just storing away a little money periodically is that the modern world is a world of change and a certain amount of unpredictability. Very often inflation will eat away at the value of the money you have saved. For instance, when a child is born we can assume that a fund for college will be used in about 18 years. If a college education costs about five thousand dollars a year for four years, that’s 20 thousand dollars which will be needed. All the parents need to save is about $100 each month to meet this need. But what happens if that same $20,000 education costs more like $100,000 after 18 years have passed? This is exactly what has happened to children who were born 20 years ago today.

The solution to this dilemma would have been for the parents to have invested their money in a fund whose value increased each year, hopefully keeping up with the inflation that caused the college education to rise in price so dramatically. This is the value of investment, and why ordinary people should try to invest their savings whenever possible.