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

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

One thing that you'll hear me talk a lot about is how important it is to save. One, it's a sign that you're living sustainably; that you're spending less money than you're bringing in. It also allows you to build a cushion if anything bad were to happen—if you were to lose your job, or if there were some medical expenses that are unforeseen, or whatever it might be. Having that extra cushion is going to be really, really helpful. It's going to lower your stress level in a lot of ways.

The other valuable thing about savings is it allows you to do certain things that you wouldn't be able to do if you didn't have it. For example, put a down payment on a car, or buy a car outright, or put a down payment on a house. You need to save your money in order to do it. And that last category of buying a down payment on a house—one, it might allow you to live in the house that you want, but you can also view that as you're making an investment. You're buying a real asset in real estate.

Not only is by buying that asset you will save on rent in the future, but the house itself might appreciate. So savings allows you to also invest. Obviously, you could buy a house, you could buy rental properties, other forms of real estate. You could buy stocks and bonds. Bonds, you're essentially lending money to some group. You could buy treasury bills, treasury bonds—it's essentially lending money to the U.S. federal government.

You'll get better interest on that than if you just kept your money in a checking or savings account—and a lot better interest than if you just put your money, stuffed it in the mattress, where you'll get no interest. But if you want to take on more risk, you could buy stocks. Stocks are your buying shares of a company.

A lot of folks will say, "Oh, you'll get better return there," but there's also more risk there. Stocks can go up and down pretty dramatically depending on what's happening with the economy and depending on how people are valuing these things. But the bottom line is savings is a great start; it builds a cushion, and then you can use those savings and think about how you might want to invest it.

When you invest, you should never think that you're going to get a high return without any risk—there's usually a bit of a catch there. But investing is a way that, if you invest prudently, you should over time hopefully bring in more money than you are putting in.

One way to think about that is you're taking your savings, and you're getting your money to work for you—making your money create income that you yourself don't even have to work in order to produce. So if you save enough money and you keep investing it in thoughtful ways that aren't too risky, that money will grow, and eventually might be able to create more income than you can on your own. So it's a pretty good place to be if you can get there.