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Different Types of Savings and Investment Accounts

March 03, 2021
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For most, working is a part of life. It’s gives us the means to afford the life we want now. However, part of your paycheck needs to be saved and invested to live the life we want later, when we retire.

Investing can be riskier than saving, but investments offer better returns in the long run. You will have to save a lot more to have the same amount as an investment.

Investing vs. Saving? The major difference is that savings are done with short-term goals in mind, whereas investing is to meet long-term goals.

The magic ingredient that makes investing worth the time and money is compound interest – it’s what makes your money grow over time.

There are a number of ways you can invest your money. Some of the more common options include the following:

  • Certificate of Deposit (CD)
  • Savings Account
  • Money Market Accounts
  • Mutual Funds
  • Stock Market
  • Gold
  • Bonds

To help you find which investment option is right for you, we’ll give brief overviews of the options mentioned above.

Why you should start investing

If you always wanted to invest, there is no better time than the present. Even people who live paycheck-to-paycheck, it’s important to find a way to free up money to put towards a more comfortable retirement.

It may not be easy now, but it will be worth it later. Literally. There’s not necessarily a specific amount that’s needed. A small start can have a big impact by the time you retire.

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Investment Options

Certificate of Deposit (CD)

A certificate of deposit (CD) is offered by a bank at a set rate of interest and period. You will get a slightly higher rate of interest with a CD as opposed to your savings account.

With a CD, you typically choose a fixed period of time in which you let your money grow untouched. Once this time period is up, you receive the money you originally invested plus interest.

Be sure to only invest an amount of money you know you won’t need for the next year or so. Typical CD time periods range from six months to five years. If you attempt to withdraw from your CD before it matures, you will have to pay a fee.

Shop around for the best rates before you devote your money for that time. CDs are a conservative but safe option.

Savings Account

Savings accounts are the most common. You can open one right along with your checking account. When you leave money untouched in the savings account, you earn interest.

Savings accounts are a very safe way to invest. You are not hit with any fees if you need to access your money as long as you stay under the monthly withdrawal limit. The Federal Reserve Board currently limits you to six transactions per month.

Interest rates on savings accounts are not very high, but it’s a good way to start. Once you have a specific amount that you will not use, you can invest it in a CD or a mutual fund.

Money Market Accounts

Money market accounts are like a combination of savings and checkings. You earn interest like a savings account, but have easier access to the funds, like you do with a checking account.

With a money market account, you’re allowed to write checks and access funds with an ATM card. However, like a savings account, money market accounts have six-time monthly withdrawal limit.

Money market accounts earn a higher interest because your funds are invested into financial markets. Most banks also require a higher minimum deposit compared to savings accounts.

Mutual Funds

Mutual funds are offered by banks and investment houses. They are professionally managed and charge annual fees and, in some cases, commissions.

They have many portfolios to choose from as they invest in stocks, money markets, and bonds.

They’re divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek. You should do your homework before investing.

Stock Market

Stock market investing is very complex. There are so many stocks you can buy, but it is volatile.

Some investors choose to buy individual stocks and be active in their management, while others take a “set it and forget it” approach. There are many brokerage and robo-advisors online to choose from if you’re a beginner.

Investing in the stock market is a long game so don’t invest money that you may need within the next five years, at a minimum. If you’re young and have discretionary income to invest, stocks can pay off big in retirement.

Gold

Gold is yet another investment vehicle that is very popular in many countries. It is one investment that holds value over time. Even precious metals can fluctuate in value but are a good hedge in case of inflation.

There are different ways to invest in gold. The most direct way is to own physical gold bars or coins.

Indirect ways include purchasing shares of a mutual or exchange-traded fund (ETF) that replicates the price of gold, trade in futures and options, or investing in gold mining stocks.

There is a level of comfort owning the physical asset instead of just a piece of paper. But storing physical gold can cost money and finding reputable dealers to sell can be challenging.

The average gold investor should consider gold-oriented mutual funds and ETFs, as these securities generally provide the easiest and safest way to invest in gold.

Bonds

Bonds are a good investment tool if you want to park your money somewhere. These are secure, low risk, but offer lower interest rates compared to stocks.

A bond is a loan issued by governments and corporations when they want to raise money. Investors buy the bond in exchange for the face value plus interest paid back in periodic payments.

You can make money on bonds by holding them until their maturity date to collect interest or by selling them at a higher price than what was paid.

Why having a diverse investment portfolio is important

Now that you have an idea of various investment options, the next step is to think about diversification. The reason for this is simple – risk minimization. Any investment is risky, but you don’t have to and shouldn’t put all your eggs in one basket.

The younger you are, the more risk tolerant you are. You can afford the ups and downs your portfolio may face since you are many years away from retirement.

As you get closer to retirement, you need to change up your portfolio and concentrate more on conservative growth.

Investing in different ways teaches you more about the market and how to make your money grow. The key here is to find that balance between risk and reward.

Conclusion

The above are just a few of the many ways in which you can invest and accumulate wealth for a more comfortable retirement. Taking these measures early on will ensure that you are financially secure when you end your professional career.

This article is for general educational purposes only and is not written by a financial advisor.

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