What Is Investing? Growth, Risk and Compounding in Simple Terms

Investing means putting money to work so it can grow, instead of sitting still. That is the whole idea. Everything else is detail.

Rule one: time beats timing

Money left alone earns a return, and then earns a return on that return. This is called compounding, and it is the closest thing to a free lunch in money.

Example. Put aside $200 a month for ten years, earning about 6 percent a year. You pay in $24,000. You end up with roughly $32,800. The extra $8,800 is growth you never had to earn at work. Leave it twenty years and the growth is far larger than simple doubling, because the later years compound on a much bigger balance.

Rule two: return and risk move together

Higher possible returns always come with a higher chance of losing money. A savings account will not lose your money but grows slowly. A single company share might double or might fall by half. Anyone promising a high return with no risk is not describing an investment.

Where people usually start

• A workplace retirement plan. If an employer matches contributions, that match is an immediate return you cannot get anywhere else.
• A fund. A fund holds many companies or bonds at once, so one bad company does not sink you. This is diversification, and it is the main reason funds exist.
• A savings account or certificate of deposit for money you will need soon.

Fees matter more than they look

A fund charging 1 percent a year instead of 0.1 percent does not sound like much. Over 30 years on a growing balance it can quietly take a large share of the growth. Always ask what a product costs each year, in writing.

What this means for you

• Money you need within a few years does not belong in the stock market.
• Take the employer match first if you have one.
• Check the annual fee before you check past performance.
• Before handing money to anyone, look them up on BrokerCheck at finra.org. Free, two minutes.

Where to check this yourself

Every source below is free, independent and is not selling you anything. If a source is selling you something, treat it as an advertisement, not as education.

• Consumer Financial Protection Bureau - U.S. government agency. Plain-English answers on mortgages, credit cards, loans and debt collection.
• Investor.gov (U.S. Securities and Exchange Commission) - investing basics, a free compound interest calculator, and a background check on anyone offering to manage your money.
• FINRA - oversees U.S. brokers. Clear explainers on bonds and annuities, plus BrokerCheck.
• MyMoney.gov - the U.S. government starting point for financial education.
• Federal Reserve Economic Data (FRED) - the source of the rates at the top of our Money Matters page.
• HUD-approved housing counselling - free, government-approved help for buyers and homeowners.
• Illinois Attorney General - consumer protection and scam alerts for Illinois residents.
• Illinois State Bar Association - free public guides on wills, probate and estates in Illinois.
• Illinois Department of Insurance - questions and complaints about annuities and insurance sold in Illinois.
• Internal Revenue Service - the rules on retirement accounts and what is taxable.