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Index Funds: Saving Versus Investing




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This article is from the How to Start an Investment Program tutorial, author unknown.

Index Funds: Saving Versus Investing

I'm sure there are many of you out there who don't have the time or the inclination to research individual stocks and are unsure about the right mutual fund. Still, you want to put your extra money to work where it will grow at a decent rate. If you let it sit in a Money Market account, the bank will love you (while you earn three percent), but it will grow very slowly. By earning three percent, the Rule of 72's says it will take you 24 years for your money to double (72/3 is 24). Even by earning a healthy six percent in a bank CD, it will take 12 years for your money to double (72/6). This rate is O.K. as long as you don't mind retiring from your job at age 90!

In saving money this way, however, there is one upside. No risk. The money you save will always be there. This is important because INVESTING your money (in stocks, bonds, real estate, etc) as opposed to SAVING your money (money markets, CD's) incurs risks. Index Funds mirror the stock market and, consequently, come with no guarantee of returning your money. Since 1926, however, stocks similar to those found in an S&P index fund have returned an average of 10.7% per year.

 

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