Basically, when you put money in a savings account, certificate of deposit (CD), or similar low-risk account, you expect to maintain your principal without having it grow dramatically. The interest rate on your savings is predictable — and, in some cases, fixed — so you know how much you’ll earn on the money you’ve saved.
But what you won’t know is how much of a bite inflation will take out of your savings. So, even though you’ll probably end up with more cash in your account than the amount you deposited, your money’s buying power may be substantially reduced by inflation over time.
Investing generally means putting your money into securities that contain some risk. When you buy stocks or bonds or contribute to a retirement account such as a 401(k) or an IRA that invests in stocks and bonds, you can’t be sure you won’t lose some — or even all — of your principal because the prices of securities fluctuate, especially in the short term.
But, in return, investments that carry more risk also offer the potential for higher returns and earnings that outpace inflation over the long term.
