12.6 Investing for the Future

Notes

• Investing means using money to buy assets, such as stocks, bonds or real estate, that may grow in value over time.
• Risk and return: higher potential returns come with higher risk. Stocks have historically earned more than bonds or savings accounts over long periods, but their values swing more.
• Diversification spreads money over many investments. Index funds and many mutual funds own hundreds of stocks or bonds at once, often with low fees.
• Time horizon matters: money needed soon belongs in safer places; money for retirement decades away can usually take more risk.
• Starting early lets compound growth work longer. At $8\%$, money doubles about every 9 years, so $5,000 invested at age 22 could grow to about $5{,}000 \times 2^4 = 80{,}000$ dollars by age 58, if that average return held.
• Retirement accounts: a 401(k) is offered through an employer, often with a match. A traditional account uses pre-tax money and is taxed when withdrawn; a Roth account uses after-tax money and qualified withdrawals in retirement are tax-free. IRAs are individual retirement accounts that people with earned income can open on their own, outside an employer.
• Worked example: on a $50,000 salary, an employee contributes $6\%$ ($3,000). The employer matches $50\%$ of contributions up to $6\%$ of salary, adding $1,500.