History

• Investing can be as simple as putting some money in a bank savings account or interest bearing checking account. They pay a small amount of interest, so grow over time. Unfortunately, this is usually such a small amount that it doesn't keep ahead with the rate of inflation. This is the percentage that prices rise. It varies over time but historically averages about 3% per year. It is therefore important to put a portion of your money in more aggressive investments that produce a return that beats inflation.
  
  

Prevention/Solution

• Everyone needs an emergency fund that can be tapped into at times of crisis. An unexpected expense, illness or loss of job can bankrupt you if you don't have an emergency fund to fall back on. Financial planners recommend having an emergency fund of three to six months worth of expenses. This money should be invested so that it grows over time but is safe from loss of principle. Money market funds and certificates of deposits are investments that pay higher interest but have no risk of losing the original investment.
  
  

Effects

• Investing is also a way to help save money for a major purchase. This can be for a home, car or vacation. The more your money grows while it is invested, the faster you will reach your investing goal. Like the emergency fund, the investment should have as high a growth potential as possible without having too much risk. However, if the savings goal will take you several years to achieve, it is worth considering a little more risk in exchange for a little better return. Bonds or conservative stocks can suit this purpose.
  
  

Time Frame

• Investing is especially important for long term savings goals. The best example of this is college savings for children. The time horizon for this is usually ten to twenty years. Investors can afford to take more risks for the promise of greater returns. Aggressive mutual funds will fluctuate in price more, but historically grow more than conservative investments. As the child gets closer to college age, a greater proportion of the college fund should be shifted to safer investments. Investors should also take advantage of tax sheltered accounts like 529's. They can save you thousands of dollars in taxes over the years.
  
  

Considerations

• The most important reason to invest is for retirement. When your working days are over you will need money to survive. Retirement investing has the longest time horizon of all. As a result, you can afford to take chances while you are young. As with college savings, you should shift to more conservative investments as you approach retirement age. Tax sheltered retirement accounts like 401k's and IRA's are valuable ways to save money for retirement. If you don't start investing now, expect to be in the poor house later.