Having a savings account isn’t enough
Saving money is important, but it’s only part of the story. Smart savers start by building sufficient emergency savings within a savings account or through investment in a money market account. But after building three to six months of easy-to-access savings, investing in the financial markets offers many potential advantages.
Why is investing important?
Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value.
The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
The power of compounding
Compounding occurs when an investment generates earnings or dividends which are then reinvested. These earnings or dividends then generate their own earnings. So, in other words, compounding is when your investments generate earnings from previous earnings.
If you invest in a dividend-paying stock, for example, you might consider taking advantage of the potential power of compounding by choosing to reinvest the dividends. To help increase the potential benefits of compounding, start investing as soon as possible and automatically reinvest your dividends and other distributions. Read about the power of compounding and the cost of waiting.
The risk-return tradeoff
Different investments offer varying levels of potential return and market risk.
- Risk is an investment’s chance of producing a lower-than-expected return or even losing value.
- Return is the amount of money you earn on the assets you’ve invested, or the investment’s overall increase in value.
Investing in stocks, for example, has the potential to provide higher returns. In contrast, investing in a money market or a savings account likely won’t offer the same return potential but is considered less risky than investing in stocks.
The amount of risk you carry depends on your appetite — or tolerance — for risk. Only you can decide how much risk you’re willing to take for the potential of higher returns. But if you’re seeking to outpace inflation, taking on some risk may be necessary. An increase in risk may provide more potential for your money to grow.
Diversification can reduce risk
Learn the basic investing types
When it comes to investing, you have many options. Before deciding which investment vehicles are appropriate for you, it'll help if you know what they are, how they work, and why they may be a good fit for your needs.
Learn about investment types >
Stocks are subject to market risk, which means their value may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Investments in equity securities are generally more volatile than other types of securities.
Investing involves risk including the possible loss of principal.
Dividends are not guaranteed and are subject to change or elimination.
Investment and Insurance Products are:
- Not Insured by the FDIC or Any Federal Government Agency
- Not a Deposit or Other Obligation of, or Guaranteed by, the Bank or Any Bank Affiliate
- Subject to Investment Risks, Including Possible Loss of the Principal Amount Invested
Investment products and services are offered through Wells Fargo Advisors. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC (WFCS) and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.
Retirement Professionals are registered representatives of and offer brokerage products through Wells Fargo Clearing Services, LLC (WFCS). Discussions with Retirement Professionals may lead to a referral to affiliates including Wells Fargo Bank, N.A. WFCS and its associates may receive a financial or other benefit for this referral. Wells Fargo Bank, N.A. is a banking affiliate of Wells Fargo & Company.
Insurance products are offered through non-bank insurance agency affiliates of Wells Fargo & Company and are underwritten by unaffiliated insurance companies.
Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
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FAQs
Investing is an effective way to put your money to work and potentially build wealth. Smart investing may allow your money to outpace inflation and increase in value. The greater growth potential of investing is primarily due to the power of compounding and the risk-return tradeoff.
What is the importance of investing? ›
Investing money is done with the goal of building a sizeable corpus over time. Capital appreciation is an important long-term goal that helps people plan for their financial future. To grow your money, you need to consider your investment objectives and options that can provide high returns.
Why should you invest in Wells Fargo? ›
Earnings Growth: Wells Fargo's earnings have witnessed a rise of 17.86% over the past three to five years, higher than the industry's growth of 6.17%. While the company's earnings are projected to decline 7.7% in 2024, it will likely rebound and grow 9.7% in 2025.
What is the idea of investing consistently Why is this important? ›
Consistency is the key to give yourself the chance to generate the best potential return on your investment. Automatic investing – setting up a regular transfer of funds into an investment – can help avoid taking the risk of timing the market or missing out on opportunities.
Why is investing important in an economy? ›
Investment and Economic Growth. Investment adds to the stock of capital, and the quantity of capital available to an economy is a crucial determinant of its productivity. Investment thus contributes to economic growth.
What is the most important thing you can invest in? ›
Stocks generally offer a larger potential return on your investment than lower-risk investments, such as government bonds, but also may expose your money to higher levels of volatility. Best for: Investors with a well-diversified portfolio who are willing to take on a little more risk.
What is the most common purpose of investing? ›
The majority of investors seek to create an additional source of passive income. Investors guided by this goal try to invest the maximum possible amount of available funds every month and intensively reinvest earnings.
What is the most important factor in investing? ›
The amount of time your money stays invested is the most important factor in successful investing. Let's look at some ways to maximize the amount of time you have your money working for you.
What is the main point of investment? ›
An investment is a plan to put money to work today to obtain a greater amount of money in the future. It is also the primary way people save for major purchases or retirement. With stocks, bonds, real estate, or commodities, individuals can create a diversified portfolio.
Why is it important to start investing now? ›
The earlier you start investing, the faster you can grow your money and make it work for you. Inflation means your money is losing value when it's not invested. Saving and investing are different. It's important to do both, for money you may need in the near future (savings) and in the long term (investing).
Key Takeaways
In investing, risk and return are two sides of the same coin; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk. Investors can take the do-it-yourself approach or employ the services of a professional money manager.
What is the smartest thing to invest in right now? ›
Overview: Best investments in 2024
- High-yield savings accounts. Overview: A high-yield online savings account pays you interest on your cash balance. ...
- Long-term certificates of deposit. ...
- Long-term corporate bond funds. ...
- Dividend stock funds. ...
- Value stock funds. ...
- Small-cap stock funds. ...
- REIT index funds.
Overall, investing in businesses is a smart move for any business owner. It can help you to diversify your portfolio, generate additional income, and build relationships with other professionals. If you are looking for a way to grow your business, investing in businesses is a great option to consider.
Why investing in yourself is so important? ›
When you invest in yourself, you gain knowledge and skills that can lower the amount of time you focus on things that are less important to you and more time on things that make you happy. Even though you may not see the impact of your investment right away, investing in yourself can greatly impact your life over time.
Why investing is important at every age? ›
Investing May Help Improve Your Quality of Life
Regardless of your age, consider setting aside at least enough money to alleviate your stress level. Try an online retirement calculator to help determine how much you may need to save to retire comfortably.
Is investing really worth it? ›
Investing provides the potential for (significantly) higher returns than saving. As your investments grow, they allow you to take advantage of compounding to accelerate gains. Investing offers many different access points and strategies, from individual stocks and bonds to mutual or exchange-traded funds.
Is investing an important skill? ›
Key Insights
Investing can help individuals become financially literate, understand the relationship between income, expenses, assets, and liabilities, and make informed financial decisions. Soft skills such as emotional control, self-discipline, and time management can be honed through investing.
