The old saying, “It takes money to make money” is a misunderstood and misused statement. If this were to be taken literally, in the context of how most people use it, no one without assets would ever become wealthy. That’s simply not the case. History is filled with people that rose from humble beginnings to become wealthier than they ever imagined.
What this saying really alludes to is the necessity of making your dollars work for you. It is a subtle difference but, here is my understanding of the true moral - if you have the ability to save or invest, those dollars can’t just sit idly gathering dust. Your money has to work for you. Money under the mattress (or at low interest) does not provide forward progress and momentum towards financial success. In reality, it even loses ground when you consider your actual purchasing power. Even if you think of this as “safe”, you still have risks due to the compounding effects of inflation. What this saying really means is that you need to put your money in places that produce a return. You worked hard for your money. Make sure it is also working hard for you.
It is important to know and recognize the distinction between saving money and investing money. Within each category there are numerous sub-options but, before putting money anywhere, you should know if you are saving it or investing it. You can figure out the answer with one simple question; do I carry the risk of losing principal?
When you “save” money, like in a bank savings account or CD, or certain types of fixed insurance products, there is not a risk of losing principal, so long as you stay under specific FDIC (Federal Deposit Insurance Corporation) limitations or other contractual guarantees on deposit amounts. Now, this is not to say that there may not be some types of risk that even these accounts could be exposed to, such as inflation risk, but your principal investment value is protected and you can typically earn at least a minimal rate of interest.
Investments on the other hand, have risk. An investment typically depicts opportunity. There is an opportunity for higher growth but, there is also a possibility of loss of principal. If there is a risk of loss, you are making an investment.
The content of this book discusses many common options for saving and investing, gives a general indication of their respective level of risk, and evaluates their potential uses in your total planning. This is not a complete or comprehensive list, nor will it cover everything you need to know about each option before depositing or investing capital but, it will cover the majority of what the average saver or investor may encounter in their lifetime and general, need-to-know information.