You want to earn more than the interest trickling in on your savings account. But in this volatile economy, it's hard to imagine trusting anyone with your hard-earned cash. Investments range from high risk to low risk, so the investments you choose depend on your objectives. You might have a short-term goal, like buying a home, or maybe your focus is long-term earnings to help make your golden years more posh. Whatever your goals, you can find investments that provide growth with lower risk.
Contribute to an employer-based plan like a 401k or 403b if you want to keep more money in your pocket and out of Uncle Sam's. Contributions reduce your taxable income -- you don't pay income taxes on contributions and earnings until you withdraw them, usually during retirement. Many employers match contributions up to a certain dollar amount. That's free money, so this should be the first place to park some of your paycheck for long-term savings.
Choose from your plan's menu of mutual funds and government bonds. Ask which funds are considered the lowest risk. Spreading your contributions among a mix of funds can reduce some of the risk and produce higher yields than sticking with the safest options.
Open a traditional or Roth Individual Retirement Account (IRA), or both, if you are eligible. You can open an IRA through a bank, mutual fund company or brokerage firm. Fees and investment options vary by provider. A bank may offer a certificate of deposit (CD) IRA, which provides a fixed interest rate for a specific time period and no risk to your principal. Or you can open an IRA at a brokerage firm where you can purchase stocks, mutual funds, CDs and other investments. Financial experts, including the U.S. Securities and Exchange Commission, generally recommend buying low-cost, diversified mutual funds in your IRA brokerage account. Study up on the IRS rules regarding annual contribution limits for IRAs and tax the implications before opening either type of IRA.
Buy stocks and other assets through mutual funds. It's fun to think about throwing some cash into the stock market with dreams of a windfall, but the likely reality is more risk than return. The mutual fund market is less risky. Through a mutual fund manager, your money is spread over a diversified pool of money market funds, bonds and other equities. This enables your investment to adjust to market fluctuations and build capital over the long run. Money market funds tend to be the safest of mutual funds since by law they can only invest in specific low-risk, short-term investments issued by the government or U.S. corporations. Selling mutual funds is relatively easy, too, allowing you quick access to your cash.
Earn a higher interest rate than your savings account pays by opening a CD or money market account. CDs offer relative safety and you know your return ahead of time. Early withdrawals bring penalties, so choose a term that matches your plans for using the cash. Money market accounts don't require a time commitment, but may have a lower interest rate than CDs. However, you can withdraw money at any time without penalty.
Buy U.S. government-backed investments such as Treasury bills, notes, and bonds, collectively called "Treasuries." They are among the most secure investments, but their rates of return are minimal. Savings bonds can be purchased for as little as $25, while $1,000 is the minimum to buy a Treasury bill or note. Savings bonds and notes pay fixed interest every six months until maturity. Notes mature in two to 10 years; bills mature in a year or less.
- Consult a financial or tax adviser before making investment choices.
- Be wary of investment opportunities promising high-yield returns with minimal investment -- these often are Ponzi schemes in disguise.
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- Financial Web: Safe Investment Options When You Can't Afford Losses
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- FDIC: Insured or Not Insured?
- Treasury Direct: Treasury Securities & Programs
- U.S. Securities and Exchange Commission: Ponzi Schemes – Frequently Asked Questions
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