What investing is and why it matters

Key takeaways:

• Investing means allocating money to assets such as shares, bonds or funds with the aim of generating growth, income or both, but values can fall.
• Investing matters because it can support long-term goals such as retirement, wealth building, or education funding, and compounding can amplify the effect of positive returns over time.
• Saving and investing serve different roles: cash can offer stability and access, but inflation may erode purchasing power if interest rates are lower than the rate of price increases.
• Investing has become more accessible through online platforms, regular investment options, index funds and ETFs, although fees, risks and protections vary.
• Before getting started, investors need to consider goals, time horizon, emergency savings, risk tolerance, costs and the possibility of losses.

Many people feel unsure about investing when they first start learning about it. Investing is often associated with wealth or financial expertise, but access to investment products has become more widely available through online platforms, funds and regular investment options.

Investing is one way to seek long-term growth and plan for future goals, but it involves risk and returns are not guaranteed. Keeping money only in cash can also involve trade-offs, especially if inflation reduces purchasing power over time.

The right balance between saving and investing depends on your goals, time horizon, financial situation and tolerance for risk. This guide explains what investing means, how it differs from saving, why inflation matters and what to consider before getting started.

What is investing?

At its core, investing means allocating money to assets such as shares, bonds or investment funds with the aim of generating a return through price growth, income or both. Unlike cash savings, investments can generate returns, but they can also fall in value.

It’s important to understand the difference between saving and investing. A savings account can offer lower day-to-day volatility than investments, although returns may not keep pace with inflation. If the earned interest is lower than inflation, the purchasing power of cash savings can decrease over time.

Investing carries risk, but it may offer higher long-term growth potential than cash savings. Over longer periods, diversified equity markets have often delivered higher returns than cash savings, but with greater volatility and no guarantee of future results. That’s why investing is often considered for longer-term goals such as retirement, buying a home or funding education.

Why is investing important?

Investing can play a role in long-term financial planning because it gives money the potential to grow over time. Depending on your goals, investing may help support retirement planning, wealth building or efforts to keep pace with rising prices.

To see why this matters, consider a simplified example:

Imagine EUR 10,000 in a savings account earning 0.5% per year. After ten years, before tax, it would grow to about EUR 10,511. After twenty years, it would grow to about EUR 11,049. If inflation averaged 3% per year, the same amount of money would need to grow to about EUR 13,439 after ten years and EUR 18,061 after twenty years just to maintain its purchasing power.

Now compare that with a diversified investment portfolio earning an assumed 5% per year before fees, taxes and inflation. After ten years, EUR 10,000 would grow to about EUR 16,289. After twenty years, it would grow to about EUR 26,533. Of course, this is for illustration only. Returns are not guaranteed, actual outcomes can be higher or lower, and investments can fall in value.

The reason the gap can widen over time is compound growth, where returns can generate further returns. Compounding can be powerful over long periods, but it depends on investment performance, costs, taxes, inflation and how long the money remains invested.