If you've never invested before, the vocabulary alone can feel like a wall. Stocks, ETFs, index funds, savings accounts — they all involve "putting money somewhere," but they are not interchangeable, and they don't do the same job. Let's take them one at a time.
The three things, defined plainly
A bank holds your money and pays you a small amount of interest for the privilege of using it. It's extremely safe — FDIC insured up to $250,000 — and extremely low-reward. Most savings accounts pay well under 1% interest, while inflation runs around 2-3% a year, meaning the actual purchasing power of money sitting in savings tends to shrink slowly over time.
A single share of stock is a tiny piece of ownership in one specific company. If you buy a share of Apple, you own a sliver of Apple — its profits, its losses, its ups and downs, all of it tied to that one business. Buying individual stocks means your money's performance depends entirely on how that one company performs.
An ETF is a basket of many stocks (or bonds, or other assets) bundled into a single, tradeable share. When you buy one share of an S&P 500 ETF, you're buying a tiny slice of roughly 500 different companies all at once. Instead of betting on one company's fate, you're spreading that bet across hundreds of them — which is a big part of why ETFs are the most common recommendation for beginners.
How they've actually performed over time
Numbers tell this story better than definitions do. Here's what $10,000 sitting in each option for 20 years would look like, based on long-run historical averages:
Illustrative example based on long-run historical averages. The S&P 500's 30-year average annual return through 2025 has been about 10.4%; typical savings account rates have hovered well under 1%. Past performance does not guarantee future results — savings accounts are far less volatile and your principal is insured, while ETF values can and do fall.
That gap isn't a fluke of one good 20-year stretch — it's the consistent pattern over the long run. A savings account is designed to protect your money. An ETF tracking the broader market is designed to grow it, and over long periods, history shows it usually has — with real ups and downs along the way.
ETFs can lose value — sometimes a lot, sometimes for a while
The S&P 500 has had brutal years — down nearly 40% in 2008, for example. A savings account never does that. The higher long-term return of stocks and ETFs comes with real short-term risk, which is why this kind of investing makes the most sense for money you won't need for years, not money you might need next month.
Why a single stock is riskier than it sounds
Buying one company's stock can feel exciting — you're picking a winner, betting on a brand you believe in. But it also means all of your risk sits in one place. If that one company has a bad year, a scandal, a failed product, or simply falls out of favor, your investment falls with it. There's no other 499 companies in the basket to soften the blow.
That's not a reason to never buy individual stocks — plenty of experienced investors do, often as a smaller portion of a portfolio built mostly around broad ETFs. It's a reason to understand which kind of risk you're taking on, and to size that risk appropriately.
Warren Buffett's advice: invest in what you know
Warren Buffett — one of the most successful investors in modern history — has repeated a version of the same advice for decades: invest in businesses you actually understand. Don't buy a company because a stock ticker is trending or because someone online says it's about to "moon." Buy into something you can explain in a sentence, where you understand how the company actually makes money.
"Never invest in a business you cannot understand." — a piece of advice attributed to Warren Buffett, echoed in many of his shareholder letters over the years
This advice matters most for beginners precisely because it's so achievable. You don't need an MBA or a finance background to understand that Costco sells groceries in bulk and makes money on memberships, or that a company like a major airline makes money by selling seats on planes. You probably already understand more businesses than you think — the brands you shop at, the apps you use daily, the company you or people you know work for.
"Invest in what you know" is really "don't gamble on what you don't"
The point of Buffett's advice isn't that familiarity guarantees a good investment — plenty of well-known companies have lost value. The point is that understanding a business lets you actually evaluate whether its stock price makes sense, instead of just guessing or following hype. For most beginners, that same logic is exactly why a broad-market ETF — something you understand as "a slice of the whole economy" — is an easier and lower-risk starting point than picking individual companies.
Where this fits with the rest of this site
None of this — savings accounts, stocks, or ETFs in a regular taxable account — directly reduces your MAGI the way a Traditional IRA contribution does. But the same underlying principle from our first article applies here: money sitting still in a savings account is losing ground to inflation, while money invested in a broad ETF has historically grown. Whether that investing happens inside a Traditional IRA (protecting your benefits) or a regular taxable account (building wealth alongside it), the core math is the same.
Start with your retirement account
If you haven't opened a Traditional IRA yet, see how a contribution affects your MAGI and your benefits before deciding where else to invest.
Try the calculator →Ready to open an account? See our recommended brokerages →