Below are just some of the ways to invest your money based on your investment strategy and goals.
Savings Accounts
A bank or credit union offers savings accounts, which earn some interest. This money is usually readily accessible and liquid to meet your more immediate cash needs. However, due to the low interest rate that savings accounts earn, they may not be suitable for your longer-term savings goals; their values would not typically grow fast enough to keep pace with inflation.
Money Market Funds
Money market funds are a form of a mutual fund and serve as another savings vehicle. They provide you with liquidity since the fund usually has a steady price of $1.00/share (though they are not always guaranteed to always be at $1.00/share). The fund also typically earns a higher rate of return than a savings account.
These funds usually have check writing features, but often there is a minimum amount per check. Therefore, they may well serve as part of your “emergency fund,” rather than your more frequent banking needs. Inflation would also be a concern over time for these fund balances.
Certificates of Deposit
Certificates of Deposit (CDs) are savings vehicles available through banks and brokerage firms. In choosing a CD, you must select the term of the CD (i.e., 6 months, 1 year, 5 years, etc.). The longer the term, the higher the interest rate your money earns. You may access your money before the end of the term, however there is usually a penalty for early withdrawal. This penalty is deductible on your income tax return. Inflation would be a concern over time with a CD.
Mutual Funds
Mutual funds are an investment vehicle that can meet many financial objectives – short- or long-term needs. A money manager pools together all of the money from the investors who purchase the mutual fund. The manager then decides which securities (stocks, bonds, etc.) to purchase. By owning a share in a mutual fund, you own a little piece of each security held in the mutual fund portfolio. This may help you to minimize your risk and diversify your holdings. Money managers manage these funds – buying and selling securities – within the mutual fund as they see fit.
The mutual fund usually has a predetermined objective and investment category (i.e., domestic stock fund, foreign stock fund, government bond fund, money market fund, etc.). The objectives range from very conservative to very aggressive strategies. Investing in a mix of them allows you to maximize the rate of return on your portfolio while taking less risk. Mutual funds are available for purchase through banks, brokerage firms, investment advisors, financial planners or directly through a mutual fund company.
Mutual funds may or may not be suitable for your financial situation. The greater the amount of your investments, the greater is the possibility that other investment arrangements may be more cost and tax effective.
Stocks and Bonds
Individual stocks and bonds may be purchased through a brokerage firm, investment advisor or financial planner. You can also purchase them yourself through a self-directed brokerage account. With a self-directed account, the commissions would be less than when you purchase these securities through a brokerage firm, for example. However, you also would not receive any advice.