Investing is often thought of as something complicated and available only for those with substantial wealth. Both assumptions are completely false and keep many from watching their savings (no matter how small they may be) from growing.
According to Gallup, only 54% of Americans own stock, outright or through self-directed retirement accounts. That leaves nearly half of Americans away from the opportunity to grow their hard earned money. If you’re completely lost when it comes to various investment options, here are simple ways you could be putting your money to work without making the issue too complicated.
A typical savings account is your simplest form of earning some interest on your money. It’s simple to open and virtually effortless to maintain, and it gives you a high liquidity, which means you’re able to access your cash quickly. There is, however, an issue with putting all of your saved money in a savings account. The interest rate you’ll get from your savings account will be extremely low, ranging from 0.06% – 1% at best! So even though opening a savings account may be a good first step for those who don’t have much saved, this should not be looked at as a long-term option as you go forward. Because of terribly low rates, today’s savings accounts are more or less your grandmother’s “under the mattress” saving options.
Quick word of caution: please make sure you know the fee structure for maintaining your savings account. Especially if your balance goes below a specified limit. You may end up paying more in fees than earning interest!
Money Market Account
A step up from a traditional savings account will be a money market account. Both are FDIC insured up to a certain amount, and a money market account is also very easy to open. You can do that at pretty much any bank.
Just like savings, your money market account will have limitations on how many times you can withdraw your money from it in a period of 6 or 12 months, and there are penalties associated with early withdrawals. Because money market accounts have slightly higher requirements on minimum balances than savings, you can earn higher interest on your saved money. This option still gives you much control and high liquidity, in case you had to access your funds quickly.
CD – Certificate of Deposit
If you’re in a place where you can put your money to work for a period of at least 6 months without needing to tap into that stash then opening up a certificate of deposit could be your next best option. CDs range from 6 months all the way to 5 years, and the longer you’re willing to keep your hands “off,” the higher the interest rate will be.
CDs are still quite liquid, meaning that you can access the funds in case of emergency, you’ll just have to pay a much steeper penalty (even up to 3%); so make sure you understand the financials and penalties before you opt for a CD.
You don’t have to open your CD in the same bank you have your savings and checking accounts at. Call a few local banks or even credit unions and compare the rates and fees. Only then, make a decision.
Opening up a CD is very easy, and maintaining it is effortless. If you’d like to read about various CD options, here is a great simple summary from bankrate.
IRA stands for Individual Retirement Account, and Roth IRA means you invest post-tax funds in order to enjoy tax-free withdrawals later. Unlike a traditional IRA where you can invest pre-tax money but you’re taxed on the back end, your investments in Roth IRA are done with after tax money but there is no tax penalty at the time of withdrawal. Keep in mind that your contributions (but not your earnings) are eligible for tax-free and penalty-free withdrawal.
A Roth IRA is subject to income limitations, and each individual eligible for a Roth IRA can invest up to $5500 a year.
A Roth IRA is an option that presents much more attractive interest rates, and it can be invested in a conservative, middle of the road, or aggressive plan, depending on your age and risk factors.
You don’t have to be an investment wiz in order to put your money to work in a Roth IRA. If you’d rather have professionals manage the fund for you, you can visit your local banker and open a Roth account on the spot. You can get online access to monitor your earnings or just depend on your monthly statements.
Here is a simple math equation to show the value of Roth IRAs. If a 25 year old starts investing $5000 a year in a Roth IRA earning an average of 8% interest, that individual will have around $1.4 million saved by age 65!
401k / 403b Retirement Plans
If saving money is hard for you, and you’d rather adopt an “out of sight, out of mind” strategy, then make a decision to invest a certain percentage of your pre-tax dollars into your employer’s retirement plan option. Even if you start at 1% or 2%, something is better than nothing!
If your employer has a match, then it’s a no brainer. You should invest the same percentage of your income that your employer offers to match. This option doubles your money instantly!
Keep in mind that since you opted to enjoy tax-free contribution on the front end, your investments are subject to taxes and fees during the time of withdrawal. You’re also penalized heavily for early pre-retirement age withdrawals.
There are ways to “borrow” funds from your traditional retirement plans without incurring those hefty penalties, just make sure those funds are paid back on time!
As you can see, you don’t have to be a pro in order to put your money to work. All it takes is a little bit of commitment, determining how much of your current income you can commit to investing and then determining the option that fits your current financial situation best.
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