Financial Know-How

Options for Savings & Investing

If you’re getting ready to enter the workforce, or if you’ve realized you need to find a way to put a few dollars away for the future, you will be happy to learn you have dozens of options, including CDs, 401(k)s, IRAs, MMAs, and lots of other options that you can pick and choose from.

A quick note on the difference between “Saving” and “Investing”: When you Save money, you give it to a financial institution that is normally insured by the government to produce the money back to you, with interest. When you Invest money, you’re placing it into a market where you will hopefully earn interest as the value of your investment goes up, this money is not insured or guaranteed by any agency, but normally has a higher potential interest rate.

The difference between the two may play a part in where you put your money. If you’re looking to buy a new car in a year and want to save a down payment, you might want to look at a savings option, as your money will both grow and be guaranteed, but if you’re looking to start putting money away for retirement or other long-term goals, you’ll likely want to look at an investment option, as the money will likely have a higher rate of growth over time, even without the guarantees.

Saving Options:

Savings Account – The most basic of options for saving money. You go to your bank of choice, give them the money you’d like to save, and they keep the money until you’re ready to take it out. Your money won’t earn much, but it is safe.

This may be a great place to ship a few dollars a month from your part-time job, to get you started with saving and maybe set up a small nest-egg for after graduation.

Money Market Account (MMA) – Similar to a savings account, but generally with more rules. Some MMAs have restrictions on withdrawals, others have minimum requirements to open. Your money will likely earn more, but you may have less opportunity to use it.

If you have a short range goal, like the down payment on a car, or a big-ticket item, an MMA may be a safe way to earn a little interest while saving.

Certificate of Deposit (CD) – Does not play music, but does normally have a higher rate of interest than a savings account or MMA. You are essentially buying the bank’s product with the promise that when you return it, it will be worth more money. When saving with a CD, you will select a length of time, turn over a lump sum of your money, and wait until the end of that time to get your money, plus interest, from the CD.

If you wind up with a large chunk of cash, maybe your graduation presents or some other financial jackpot, a CD is an excellent option if you don’t “need” the extra money

You may find other savings options, specific to your bank or location, but these are three of the most common routes you can consider when selecting a safe place for your money.

Investing Options:

401(k) – When getting ready for your first job, you may want to talk with the employer about a 401(k). If your employer offers a 401(k) plan, this means they likely will match your investment up to a certain percent of your salary. For example, if you make $50,000 a year at your job, and your company is willing to match 5%, they will contribute up to $2,500 to match your investment. This is Free Money.

401(k) plans can be the most effective use of your money, especially with a high-percentage match from your company. Not all companies offer this plan, so make sure it is a question you ask when looking at different opportunities. The 401(k) can be an invaluable piece of your retirement plan.

Individual Retirement Account (IRA) – A popular form of investing with two formats: the Roth IRA is money invested that under current rules will not be taxed when withdrawn, and the Traditional IRA that allows for contributions to be tax-deductible now, but will be taxed when withdrawn.

An IRA can be opened at almost any time, and for many plans there is no minimum on the contribution amounts. Individuals interested in planning for their retirement now may be interested in discussing IRA options with a trusted advisor.

Mutual Funds – Mutual Funds offer greater risk than the savings options listed above, but can also offer more money in return. Unlike 401(k) and IRA plans, the Mutual Fund normally does not have as many restrictions for withdrawal, such as age or time. Mutual Funds are purchased shares in other investment opportunities, such as stocks or bonds, with a Fund Manager controlling where the money is invested.

If you’re looking for a shorter investment opportunity, perhaps to save for a down payment on a house, or to invest a larger sum of money, a Mutual Fund may be an option to investigate.

While there are certainly more types of investments out there, these are three relatively simple options to pursue if you’re ready to earn a little more from your money.