Saving and Investing
Saving and investing strategies help individuals achieve personal financial goals.
18. Different costs and benefits are associated with saving and investing alternatives.
The alternatives for saving and investing offer different costs and benefits.
Saving options include:
- Passbook savings accounts – convenient, low risk, limited return, little protection against inflation;
- Money-market accounts – liquidity, insured, can yield higher returns but returns can fluctuate; and
- Time deposits – may not withdraw for period of time, greater risk can yield higher returns, three types (i.e., fixed-term, certificates of deposit, open-account).
Investment options include:
- U.S. saving bonds – way to save, interest exempt from taxes, safe, lower return;
- Stocks – higher returns, greater risk, broker fees;
- Mutual funds – diversified stocks, lower risk, broker fees;
- Real estate – rental income, generally appreciates;
- Annuities – regular payments to beneficiary for specified period;
- 401(k) plans – employer-sponsored retirement plan that allows employee pre-tax dollars to accumulate tax-free; and
- Roth IRAs – after-tax contributions with tax-free earnings and tax-free distributions.
Wealth increases over time with systematic investments multiplied by compounding interest.
Diversification reduces personal risk by spreading around one’s investments into different sectors of the economy.
Expectations for Learning
Distinguish among the different costs and benefits associated with saving and investing alternatives.