Hopefully, if you’ve been saving long, you’re starting to build up a tidy little sum in your savings account. Before too long you’re going to wonder what to do with all that cash. You know there are investment options available, but you’ve also heard that some people have lost their shirts with their investments. Should you get involved? Maybe it would be best to stay out? What, exactly, can you do with a little extra money, and what are the risks?
You could continue to what you’ve always done, i.e., leave the money in your savings account. This is possibly the safest option, since all bank deposits are insured. Even if your bank should fail (as mine recently did), your money would still be safe (up to $100,000). The downside of this strategy is that you’ll be earning fairly low interest rates. My new bank is currently paying 4.2% on a money market savings account. While that’s pretty good for a savings account, it’s only a tiny bit above the inflation rate, which means it would take an excruciatingly long time to grow your nest egg. This type of savings account would be a great place to keep your auto insurance premium, for example, if it was due three months from now.
A bank Certificate of Deposit (CD) is an option with an attractive feature – it earns a higher rate than a savings account. My bank is currently paying 4.8% for a six month CD, and this money is also fully insured. The downside is you have to tie up your money for six months. If you need this money before the six months are up, you’ll have to pay a fee to get the money out. Because of this limitation, CD’s are great places to keep money you don’t need right away, but will definitely need in the near future, like the money you’re saving for your vacation next summer.
But what about stocks, bonds, and mutual funds, that’s where the big money is made, right? Yes, but big money can be lost here as well. These types of high-octane investments can be thrilling and depressing, sometimes all in the same day. Tune in next week when we discuss the advantages and disadvantages of each.
This post was previously published in the November 14, 2007, edition of the Greenhorn Valley View.