THE BASICS OF INVESTING
When most people think of investing, they think of the stock market. Although that is definitely one option, the truth is that "investing" can be defined as "a place or financial instrument in which you place money and expect a financial return." This means that you have many different choices of where to put your money, and the following is a review of many of these options. Just remember that you don’t need to have millions—or even thousands—of dollars ready to invest. All you need is patience and a desire to put your extra money to work for you.
This is the most basic type of investment. Savings accounts can be opened at most banks, usually only require a small amount to start (around $100 or less), are insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000 and can be accessed easily. They are also a smart way to build up an emergency savings account in any amount, from $500 to six months of take-home pay.
The main drawback of a savings account is because it is fairly low risk, it is also low reward, paying only a small amount of interest. Even then, that interest is often linked to a minimum balance requirement, so you’ll want to try and maintain that minimum balance in order to maximize your return.
CERTIFICATES OF DEPOSIT (CD)
A Certificate of Deposit, or CD, is similar to a savings account in that you don’t need a lot of money to invest in one, it can be opened at almost any bank and your money is insured by the FDIC up to $250,000. It also shares a lower rate of return due to its low risk. The main difference is that you have to keep your money in the CD for a set amount of time or pay a fee for early withdrawal, which reduces your access to the funds. When looking for a CD, find out what other qualifications the bank has — some may require you to have another type of account with them, and rates can vary significantly from bank to bank. You’ll have plenty of options, and it’s best to comparison shop so you can get the most return for your money.
MONEY MARKET ACCOUNT VS. MONEY MARKET FUNDS
A money market account (MMA) is offered by a bank, whereas a money market fund (MMF) is usually offered by a brokerage house. The money you place into an MMA is invested by the bank into government and corporate securities that are deemed low risk and as such, offer a lower rate of return. Sometimes you can even write checks out of an MMA as you do with a checking account. While usually providing a higher rate of return than a savings account or CD, an MMA does require a higher dollar amount to open and maintain, and you are charged a fee if you don’t meet those guidelines.
A Money Market Fund, or MMF, is similar to a money market account, but is actually a mutual fund that invests in safer instruments (bonds, treasuries, etc.) on a much, much larger scale. It also requires more money to open than even an MMA, and your money cannot be withdrawn as easily as in an MMA.
An annuity resides in a bit of a gray area: Some see it as an investment, while others see it more as a financial insurance product. Basically, an annuity is when you pay a certain amount of money (usually to an insurance company) into a plan that, at a certain date, pays you back (plus interest) in steady monthly payments. While it was designed to guarantee a steady income in retirement, some plans allow you to take the money out all at once in exchange for a lower rate of return.
The benefits of an annuity include the stability of the investment and the steady payout in retirement. The major drawback is that there are many, many different options — so many, in fact, that it can be overwhelming. But you can use that choice to your advantage by shopping around, checking out as many options as possible and, if needed, consulting a financial professional to sort out your options.
INDIVIDUAL RETIREMENT ACCOUNTS (IRA)
At the most basic level, an IRA is a type of retirement account in which you put money, with that money being used to buy certain types of financial assets and instruments. There are many different kinds of IRAs; each has its own qualifications, tax benefits, rates of return and rules about what type of investments can and cannot be included.
The major advantage of any type of IRA is that it is long term, providing plenty of time for your money to grow regardless of market swings or economic conditions. The drawbacks include rules and restrictions, including the maximum you can contribute each year (currently $5,000), when you can withdraw the money, how you can take a loan against the account and more. Make sure you know all of the rules and restrictions and consult a professional if you’re not sure what to do.
THRIFT SAVINGS PLAN (TSP)
Considered by many financial experts as the best way for military families to save for retirement, the TSP is a federally sponsored retirement savings and investment plan that works much like a civilian 401(k): you place money into a fund (or funds) that invests in various instruments and financial markets.
A key benefit is that contributions are taken directly out of your paycheck pre-tax, making it easy to save while reducing your taxable income. With only a handful of funds from which to choose, a TSP is easier to navigate than a 401K, and you can likely find one (or several) that meet your needs.
The drawback is that a TSP requires patience and a long-range view of your finances, something that can be difficult when you see the value of your account drop with every dip in the market. Remember that a TSP is for saving money over the course of a few decades, not just a few months or even years, so the odds are in your favor. The website www.TSP.gov has a great deal of information about the plan, its fund options and all of the various requirements and restrictions.
The information above is not intended to tell you where to invest your money; it is merely here to explain the different investment options available to you. To obtain financial advice to fit your personal situation, see a financial professional licensed in your state.