A savings account is a good place to keep money for short-term goals. However, this is not a good choice if you are saving money for a goal that is five or more years away. Money saved for long-term goals needs to be protected from “purchasing power risk.”
Inflation tends to cause prices to increase each year. That means that the money you have in 10 years won't purchase as much as the same amount would purchase now. The risk that your dollars will be worth less in the future is called “purchasing power risk.” For example, remember when you were a child how much less money it cost to purchase a candy bar? It may have only cost you a nickel or dime to buy the same candy bar that now costs $1.00. Inflation (in the years since you were a child) has caused your money to have less purchasing power than now.
A savings account or a CD does not protect you from purchasing power risk. Investing in stocks and bonds for long-term goals can help avoid purchasing power risk.
There are options for investing your money. Examples include: individual stocks; bonds; and mutual funds that invest in stocks and bonds. With good investments, you’re likely to make more money than by keeping your money in a savings account. However, you have to be able to handle some losses, too. Your investment’s value can go up or go down.
The value of an investment in stocks and bonds changes from day to day. Over a year, it’s not guaranteed that your investment’s value will increase. The risk of losing some of your money is great in any one year. However, if you keep an investment for a longer time (for example, five to ten years) you are more likely to make money.
University of Illinois Extension has a web site to learn more about investing. Visit, Plan Well, Retire Well: Your How-to Guide, at http://www.retirewell.uiuc.edu. This web site explains a simple step-by-step way to invest.