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Saving is putting money aside for future use. It's important to save so you can cover fixed expenses, like mortgage or rent payments, and to make sure you're prepared for emergencies. Generally, people put their savings in bank accounts, where up to $250,000 is insured by the Federal Deposit Insurance Corporation (FDIC).
Investing is when you put your money to work for you. You buy an investment, like a stock or bond, with the hope that its value will increase over time. Investments have the potential for greater returns than you’d receive by putting your money in a bank account.
In this example from 1998 to 2018, Diego put $3,000 each year in a bank account to fund his short-term spending needs. The interest he received on his money averaged 1% over 20 years, which was relatively low. But the trade-off was that it was safe and accessible. Diego had $67,694 after 20 years. Over that same period, Alexis was planning for her retirement so she invested $3,000 each year in a moderate portfolio, which returned an average of 6% over 20 years. Alexis had $115,314 after 20 years.
This opportunity to earn more money comes with additional risks—including the loss of some or all of your investment. Different types of investments have different levels of risk, so it's important to understand your risk tolerance Tooltip —or your appetite for risk. If you're working toward a long-term goal, it’s a good idea to consider investing as opposed to saving. Recently, savings rates haven't kept up with the rate of inflation. This means that if you put all your cash in savings, the actual purchasing power of your money could shrink over time.
It’s important to understand the effects of inflation because it decreases the amount of goods or services you can buy (purchasing power), all else being equal. Here we see that with a hypothetical 3% inflation rate, the fixed, annual $50,000 pension can only purchase $37,200 worth of goods or services at the end of 10 years (a 26% loss of purchasing power) and $27,684 worth of goods or services at the end of 20 years (a 45% loss of purchasing power).
Investing can help you achieve financial goals, like buying a home or funding your retirement. By investing, you're putting your money to work to reach these goals. Let’s see how it works.
Alexis invests $3,000 a year for 40 years and receives an average annual return of 6%. At the end of 40 years, her portfolio is worth $492,143. This amount consists of $372,143 in total earnings and her principal investment of $120,000. How did her portfolio grow so much? It’s because every year, Alexis's 6% return is on a new, larger balance (made up of her initial investment, her subsequent yearly investments, and the money she’s earned from dividends and capital gains on the investment). That's the power of "compound returns."
Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via an exchange.
CFD trading on cryptocurrencies
CFDs trading are derivatives, which enable you to speculate on cryptocurrency price movements without taking ownership of the underlying coins. You can go long (‘buy’) if you think a cryptocurrency will rise in value, or short (‘sell’) if you think it will fall.
Both are leveraged products, meaning you only need to put up a small deposit – known as margin – to gain full exposure to the underlying market. Your profit or loss are still calculated according to the full size of your position, so leverage will magnify both profits and losses.
Exchanges bring their own steep learning curve as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limits on how much you can deposit, while accounts can be very expensive to maintain.