Got long-term savings to invest? We'll help you figure out where to put it. But first, let's talk about what long-term savings means.

What is "long-term" savings?

• Bond investors consider anything 10 years and over to be "long-term."
• Many regular consumers think of long-term savings as something that won't need to be accessed in the next five years.

But instead of getting technical with the length of time, let's think about the sorts of reasons we might be saving long-term:

• For retirement; the length of time will depend on your age and how much you want to save.
• For college; it will be pretty obvious, based on your children's ages, how long you'll need to save! We'll assume your children aren't in high school yet if you're thinking of their college funds as long-term savings.
• For a major purchase, such as buying a home or starting a small business. If you're planning at least five years out to save up a down payment for a home or other major purchase, we'll classify that as long-term savings.

What shouldn't be considered long-term savings: your emergency fund, a savings account to buy something like a car, or anything you'll need to access in the next few years.

You are never too young to start investing. No, I don't know how old you are, but if you can read and type well enough to be here reading this article, it's a pretty good bet you've got some understanding of personal finance and a curiosity to know more. You've come to the right place!

Investing is, in many ways, like learning a second language: It's easier, and more rewarding, to get started when you're young. My grandpa gave all of his grandchildren heavy silver coins when we were very young; since then, I have been fascinated with the concept of storing something away with the hope that its value will grow over time.

When do you invest?

Risk tolerance, simply put, is your own comfort level with the ups and downs of investments. Fancy definitions in text books might call it "the degree of uncertainty an investor can handle in regard to a negative change in his portfolio"; but when you are making decisions about investments, you might look at it this way: "how much can I afford to lose?"

Low risk, low reward potential

While there are no totally safe investments, there are many whose likelihood of decreasing in value is so small that it is practically zero. Inflation aside, a savings account, for instance, will not fall in value unless your bank fails at the same time the FDIC implodes; theoretically possible but with a statistical probability of practically zero.

But the flip side of FDIC-insured investments is that the upside - the chance that your savings account will increase in value beyond the interest rate your bank offers - is also close to zero. There's little downside risk, but also not much upside potential. If this is what you prefer, you have a low risk tolerance.

Every incorporated company--even the coffee shop on the corner and the used record shop next door--has stock. Stock is a way of holding ownership in a company, tangibly, through stock certificates (which are today mostly virtual). When you "buy stock" you are buying a small percentage (a share) of ownership in that company.

In the simplest case, if the company does well--makes a profit by selling a product or service for a price that is higher than the company's cost--the value of your stock will rise. Conversely, if the company cannot sell its product or service, or has expenses that are too high, the value of your stock will fall.

Why buy stock?

Let's take an example company: a bookstore. In order to open for business, the bookstore owner must rent a store, buy shelves and tables, buy books from distributors and hire employees to sell the books. If all the money for these expenses comes from the owner's savings account, great: she will own all the stock. As long as she has enough revenue to cover expenses, she can continue as the sole shareholder.

Before you begin to answer the question, "Should I risk money in the stock market?" you should first assess your investment goals, needs and risk tolerance using this series of questions:

• What are my investing goals?
• When will I need this money? (Or: What is my investment timeline?)
• What is my risk tolerance?

The answer to the larger question about whether you should risk money could be "yes" for one person and "no" for another person in the exact same financial situation -- same age, same goals, same income, same investment timeline. Some of us are just better able emotionally to handle risk than others and are more comfortable with the inevitable ups and downs of the market. Others of us would rather play it safe, even if that means delaying retirement or getting by with less (now or later).

It's OK to say 'no'

If the word "risk" is the one that stands out the most when you ask "Should I risk money on stocks?" it's likely that you've already come up with an answer. You're thinking of it as a risk, and it sounds scary. You need someone to talk you into taking the plunge. Here's the thing: you don't have to. It's OK to say "no."

Investing is a broad term referring to any commitment of resources (money, time or effort) with the expectation of making a profit at some time in the future. Examples include:

• Putting money into a business in hopes of earning a share of the business's profits.
• Buying a house, putting money, time and energy into fixing it up, then selling the home based on its increased equity.
• Buying stocks with the expectation that, some time in the future, their value will increase.
• Putting money into a higher education, increasing your chances for employment, allowing opportunities for a higher salary.
• Buying knick-knacks at a garage sale, then reselling them at a higher price on Craigslist or eBay.

While some may try to persuade you that buying a vehicle or an expensive coat is an investment, this kind of purchase very rarely results in any profit. In fact, most personal finance experts agree that it is financially dangerous to think of a car as an investment; its effect on your overall financial situation typically behaves more like an expense than an asset.

How do you know the investment is worth it?

Why invest? With so many risks--and savings accounts insured by the FDIC--why should you invest when you could simply save?

You'll find as many answers as there are personal finance experts, but nearly everyone can agree that if wealth is your desire, investing is the best way to acquire it. Relying on interest from your savings account alone may help build financial security, but it is no comparison--in either risk or reward--to making an investment.

Can you get rich through saving alone?

When I was 23, I stayed at my first (and last) Ritz Carlton, in Palo Alto. It was only a stop on a string of fabulous business hotels from which I'd collected small bars of soap and shoe shine mitts: The Breakers in Palm Beach, Hotel Nikko Beverly Hills, the Pierre and the Plaza and the Waldorf-Astoria and three different W Hotels in New York City — I could go on. Fan-freaking-tastic.

I loved it, but as I was traveling on business, I rarely got to experience much more than the heady delight of opening the door to a room that cost way more than my shoes (even my nicest shoes). I wasn't paying the bill, ultimately; but I would have to pay out of pocket for things such as:

• minibar purchases ($7 for a candy bar at the W?)
• phone calls (before the days of ubiquitous cell phones, I think I spent $14.98 for one call)
• valet tips (evidently $5 is a starting rate at these fancy places)
• breakfast ($10 for granola, $12 if you want milk)

Now that I'm an adult traveling on my own dime, I stay at hostels. Continue reading...