Did you know that 60 percent of Americans are not able to pay an unexpected $1,000 expense such as car repair, or emergency room visits? Millions of people have filed unemployment during this period of shut down because many Americans are living paycheck to paycheck. If this happened to you or if you want to make sure that you are prepared for any future uncertainties, learning how to strategically save and invest your money will come in handy during emergencies.
Saving can be categorized as income that you have not spent or income that you will pay later. There are many ways that you can save in which we will discuss in this post. Standard methods of savings are putting your money in a savings account, a deposit account, or investment funds consumption. Investing is when you place your cash or capital in different investment vehicles so that it can grow over time with the risk of losses in mind. Let’s explore 15 Essential Things You Need To Know About Saving and Investing to help you get started on saving and investing.
1. Types of Saving Accounts
High-Yield Savings Account
A high-yield savings account or high-interest rate savings accounts is a type of savings account that typically pays a higher interest than the national average of a standard savings account.
Money-market deposit accounts
MMDA or A Money Market Deposit Account is a high yield savings account that has some checking account features. Interest rates at a higher rate than standard savings accounts. MMDAs are insured by the FDIC (Federal Deposit Insurance Corp). To open the account, you usually have to start with a minimum balance of $1,000 to $2,500. The checking account features of MMDAs is that You have instant access to your money and can access it from an ATM, a teller. You can also write a limited amount of checks a month.
A passbook savings account is another sort of savings account where you receive a booklet where your interest, deposits, and withdrawals are recorded. The average interest rate is lower at banks and savings and loans than at credit unions. Passbook accounts are usually used for accounts like a savings account where the report doesn’t have a lot of transactions. A passbook account is different than an ATM savings account where you receive a card that makes getting funds more accessible. Passbook accounts have higher deposit requirements and maintaining balance than atm accounts and are safer ways to save your money.
A Statement account is practically the same as a passbook account with similar interest rates and funds accessibility, except you receive monthly statements instead of a passbook. You can access your funds in a statement account through 24-hour automated teller machines (ATMs).
Interest-earning checking account
This account is a combination of checking and savings. You earn interest on any money in that account that is not used or your balance. Lower -end checking accounts will typically earn interest between 0.05% and 0.5% APY, while high-end accounts may receive just a bit more.
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are a savings account you place a fixed amount of money during a fixed amount of time, such as six months, one year, five years, and in exchange, the bank pays you interest. When you redeem your CD, you receive the original money you put in there, plus the accrued interest.CDs offer higher interest rates than savings accounts. There’s no risks and no fees, but you do have restricted access to your money, and you will be penalized if you withdraw your payment before the expiration date, which could be higher than the interest. Bank CDs are insured up to $250,000 per deposit by the FDIC.
Types of certificates of deposits
Promotional Certificate of Deposit (CD)
These are short-term CDs that pay more than the standard CD rates but do require a higher minimum investment. It is promotional, so the bank or credit union will only run the deal for a limited time.
Market-Linked Certificate of Deposit (CD)
Your earnings here are earnings based on the stock market. This CDs’ performance will adjust according to any changes in the market. Hence, as the market goes up, The CD’s potential return will increase, and if the value of the market or index decreases, the return on the market-linked CD will decrease as well.
Callable Certificate of Deposit (CD)
These CD’s have higher rates than a standard CD, but the issuer can call or redeem a CD after a certain period from you for the full amount before it matures so you’re taking on a risk. For example, your bank or issuer could call a 72-month callable CD after a year.
Rising-rate Certificate of Deposit (CD)
These have higher rates at various intervals, such as every six months, every 12 months, and so on. You can move your funds around instead of cashing it out.
2. Capital Gains
Capital gains are earnings from the sale of a capital asset such as stocks, bonds, or real estate. These profits are tax-excludable, so you do not have to pay the tax on these profits until the asset is sold. Short-term capital gains occur when you have investments that last less than 12 months, and long-term capital gains occur when you have investments that last longer than 12 months.
A bond is when you loan money to a corporation or government. You can purchase a bond at a discount. The bond has a fixed interest rate for a fixed period, and when the time is up, the bond has “matured,” and you can redeem the bond for the full face value.
Types of Bonds
Federal government Bonds
Federal government bonds are the safest investment you can make. The U.S. government has to repay its bonds even if it goes bankrupt.
Corporate bonds are sold by private companies to raise money. These bonds are generally safe to buy because if the company goes bankrupt; bondholders have the first claim to the companies assets before stockholders.
Municipal bonds are sold by any non-federal government, and the interest paid comes from taxes or incomes from individual projects. The great thing about municipal bonds is that your earned interest is excluded from the federal income tax.
4. Mutual Funds
Mutual funds are portfolios made up of stocks, bonds, and other investments that are professionally managed by a portfolio manager. Individuals buy shares, and fund uses the money to purchase stocks, bonds, and other investments. The earnings, such as profits made from dividends on stocks and interest on bonds, capital gains are returned to shareholders monthly, quarterly, or semi-annually in the form of dividends. You can receive a check or reinvest your earnings. The best advantage of mutual funds is that you have someone professionally managing your money.
Types of mutual funds
Regional Stock Fund
The professional managers will invest in securities from a specified geographical area, such as Latin America, Europe, or Asia.
Global Bond Fund
Has corporate bonds of companies from around the world.
Are mutual funds that invest in more than one asset type, such as stocks and bonds.
Global Stock Fund
Has stocks from companies in many parts of the world.
Investment portfolios that will increase over time.
Are stock and bonds with high dividends and interest.
invests in stocks of companies in a single industry such as technology, health care, banking, etc
Municipal Bond Fund
Are issued by government entities such as states and counties.
Stock represents ownership of a corporation. Stockholders own a share of the company and are entitled to a percentage of the earnings as well as a vote in how the company is run. Company earnings may be divided among shareholders in the form of dividends, which are usually paid quarterly.
The money is easily accessible, and if the market value goes up, the earnings from stocks can be substantial. Money is easily accessible. Inversely, if the market value goes down, the loss can also be significant. It is best to seek the help of a brokerage firm when to help choose and manage stocks.
6. Real estate
Inflation is a continued increase in the general price of goods and services in an economy over some time. Investing in real estate is excellent protection against inflation because rents and the values of houses habitually increase during times of inflation. You can invest in real estate by purchasing land and hold it until it rises in value, buying income property such as an apartment house or a commercial building and then renting it, or you can purchase a home, live in it, and sell it later at a profit.
7. Retirement plans
At some point in life, you will need to start saving money to use when you retire. Federal income tax on it are not immediately due on money put into a retirement account, or on the interest it makes, and the tax is paid when money is withdrawn. Since the income after retirement is usually lower, so tax rate is lower. There are penalties if money is withdrawn before retirement age, except under certain circumstances.
Types of Retirement Plans
You can contribute to a savings plan from your pre-tax earnings, and this helps to decrease the amount of tax that must be paid. Your employer will match contributions up to a certain level.
This plan allows a self-employed person to set aside up to 15% of income but not greater than $35,000
Individual Retirement Account (IRA)
You can contribute up to $5,000 of your pre-tax earnings per year. You can make contributions made in installments or a lump sum.
Roth IRA / IRA Plus
The $5,000 annual contribution to this plan is not tax-deductible, but the earnings on the account are tax-free after five years. The funds from the Roth IRA may be withdrawn after age 59, if the account owner is disabled, for educational expenses, or the purchase of a first home.
How to Start Saving Today!!
Many people have the misconceptions that you have to have a lot of money to start saving. You can start with as little as $5 a week, then $10, then $15, and keep increasing with as much as you can afford to save. Be sure to start saving in a high yield saving account so that you can receive some profits from your savings. Once you’ve reached a comfortable amount or about six months of income, start exploring investment options. What you choose depends on how much you have and how long you can afford to spend without your money.
What are your plans to start saving and investing?