Saving and investing | Investments and retirement | Financial literacy | Khan Academy

Let's talk a little bit about saving and investing.

I would define saving as just any extra money you bring in in a given amount of time that you haven't spent yet. So, let's say in a given month you bring in four thousand dollars and you spend thirty-five hundred dollars in that month. Well, then you would have saved five hundred dollars.

Now that five hundred dollars, there's many different things you could do with it. You could just put it into a bank account. You could put it into a savings or a checking account, or you could even get a certificate of deposit. Those are all very, very safe things to do with your money, assuming that nothing horrible happens with the bank.

Even if something horrible did happen with the bank, which isn't too likely, as long as it's less than two hundred fifty thousand dollars per account, that money is pretty much guaranteed. You're going to be able to access it at any time. But when you put your money into something that safe, you're not likely to get much of a return.

You'll be lucky to get even one or two percent, or even to keep up with inflation. But it makes sense to do that because you're going to have your money there; it's guaranteed. All of us need to keep some of our money in savings and checking accounts because we might need to use that money to pay a bill or do whatever in the next few weeks or in the next few months.

Now, investing is when you think about, all right, I have this money, which for the most part I would have had to have saved already. Some of it I want to invest in order to get a higher return. Try to get four, five percent, ten percent, or twenty percent.

I would start getting very suspicious if you think you can consistently get higher than ten or twenty percent return. Even higher than ten percent, you're probably having to take on a reasonable amount of risk to do that. Usually, risk and return are related. If you could get a high return with low risk, everyone would just pour their money there, so you should be a little bit suspicious of that.

But what does investing look like? Well, on the riskier end of the spectrum, it could be, hey, I'm going to buy some new startup stock—that is stock in a company that isn't making money but is growing super fast—and look at how its stock is moving up. That's a little bit speculative; that would be high risk and potentially high return.

At the other end of the spectrum, you could buy government or corporate bonds, where you're essentially lending money to the government or to a corporation. There, you might get a lower return; maybe you're getting four percent, five percent, or six percent, which is a lot more than you might be getting in your checking account.

The risk there is only if whoever you're lending it to doesn't pay it back. Obviously, if you're lending it to the government, there's a very high chance that they're going to pay it back.

So that's how I think about it. Saving is just the money that you're bringing in that you're not spending. You're saving that, and then some of that you could invest. But when you start to invest, you're going for a higher return, but you're also taking on higher risk.