Where and How To Invest Your Money

Daniel Guidotti

12 years ago

Chapter 1: Saving Money
Chapter 2: Why It’s Difficult To Save Money
Chapter 3: How To Save Money Every Month
Chapter 4: Where and How To Invest Your Money

It’s important to carefully choose where you are going to save your money. Opt for an account or an investment plan that keeps your money safe and offers a good return.

Banks

The first place where you can save your money is the bank. Here are the different types of savings accounts that you can have in a bank –

Basic Savings Account – A basic savings account is offered by almost all banks. You can deposit and withdraw money from this account but you cannot write checks or use an ATM card, which is a good thing if you want to save. The interest paid for this type of account is usually between 0.5% and 1% per annum.
High Yield Savings Account – As the name suggests, high yield savings accounts offer a higher rate of interest on your funds (about 2%), but come with a lot of conditions. Usually, this type of account requires you to maintain a minimum balance and allows you a limited number of transactions every month.
Money Market Accounts – The interest rate offered for this account depends on the minimum balance you maintain. The higher your balance, the higher your interest can be. Though it requires you to maintain a higher minimum balance at times, you are allowed to write checks if necessary.
Online Savings Account – Online banking is convenient to banks and their customers. With online banking, banks can save on their operating costs, which allows them to pay a higher rate of interest to the customers. On the other hand, you as a customer have the convenience of banking from home and save money on transit, while enjoying a higher rate of interest.

Although savings accounts are most convenient way to save money, they don’t always give you the best returns. The maximum returns you could get, can go up to just 4% or a bit more, provided you maintain a considerable amount as balance in your account.

The benefit of a savings account is that it’s liquid cash in your hand. You can link the savings account to your checking account, facilitating easy transfer of money in case of emergencies. However, this advantage may also tempt you to spend on unnecessary expenses.

Investments

Apart from banks, you can put your money in long-term investments to enjoy higher returns. But before considering a long-term investment like mutual funds or bonds, there are two things you should remember.

Safety, Income or Growth – The first step is to determine what you want from your investments – safety, income or growth. If you want safety, you should not expect your investment to grow much. If you want higher returns, you should be ready to take a risk with your investments. Similarly, if you want a consistent growth in your investments, you cannot expect regular income from it.

Time Frame – Investments can be short-term, medium-term or log-term with a lock-in period of 1-2 years for a short-term plan, 3-9 years for a medium-term plan and 10 or more years for a long-term plan. Determine your timeline depending on when you would need the money back. For example, if you have a 10 year old child, and you want to invest money for his or her college education, then the ideal choice would be a medium-term plan that would get your money back by the time your child is ready for college.

Some of the investments options, where your money can be placed for growth are mutual funds, certificates of deposit and savings bonds.

Money Market Mutual Funds

To invest in money market mutual funds that are issued by investment companies, you should have a brokerage account with the company. The funds you invest in mutual funds are used by the company for re-investing in various short-term investments, all at a time, to attain a higher interest rate. However, care should be taken while investing in mutual funds as there is considerable risk involved in it.

Certificates of Deposit

Also known as a CD, a certificate of deposit is another form of investment offered by the banks. A CD is a timed deposit, where you have to keep your money for a particular period of time, that can range anywhere from one month to many years. The interest rate offered by the bank depends on the time frame you choose: the longer the time, the higher the interest.

When you opt for a CD, you are placing the money in a deposit that does not allow regular or easy withdrawals. That way, the money remains untouched, and grows till you need it. The disadvantage of this investment is that it is not readily accessible in case of emergencies. However, you are allowed to withdraw the money before the specified time period by paying a certain amount as penalty.

Savings Bonds

Another investment option is the savings bond. These bonds, issued by the U.S government, are one of the safest options available in the world. Another benefit of investing in U.S savings bonds is tax exemption. Unlike the interest on savings accounts or CDs, which is taxable, the interest earned on the savings bond is exempted from tax until the bond is redeemed. So if tax benefit is your priority, you should invest in a savings bond rather than a mutual fund or a CD.

There are various types of savings bonds that you can choose from depending on their features.

Series EE Savings Bond – These are standard savings bonds that come with a fixed rate of interest, making it easy to calculate their value at any time.
Electronic EE Savings Bonds – These bonds are sold at face value, which means that you can buy a $50 bond for $50. The purchase of these bonds can be made directly at Treasury Direct Online that lets you buy and redeem securities in electronic form directly from the U.S Department of the Treasury. The minimum value of these bonds is $25 and an individual can purchase for a maximum of $5,000 per calendar year.
Paper EE Bonds – These bonds are sold at half their face value, which means that you can buy a $50 bond for $25. As the interest on the bond gets accrued, the value of the bond also increases but it does not reach its face value till maturity. The paper EE bonds are available at pre-determined values of $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000. The maximum allowed investment on these bonds is $5,000 per calendar year.
Series I Bonds – The Series I bonds are almost similar to the EE bonds, except that the interest rate on these bonds is not fixed. The interest paid on these bonds is directly linked to the rate of inflation and the aim of purchasing these bonds would be to keep up with inflation. These bonds, again like the EE bonds can be purchased in paper form or electronically.

With so many options available to build your savings, it should not be difficult to choose one that is perfect for your requirements. With a little bit of hard work and a lot of commitment, you can learn to manage your money smartly and also save for yourself and your family. If you want a secure and happy future, don’t put off you saving for a later time, start saving today.