You've earned your money and followed a strict budget. Now you've got a bit of cash saved up. As of 2012, savings and money market accounts are returning around 1 to 2 percent -- or less. To make your money grow requires venturing a bit further. Stocks, mutual funds and certificates of deposit are methods to explore.
After saving so carefully, the last thing you want to do is blow your cash on commissions and fees. If you want to invest in stocks, there is a low-cost option. According to the Motley Fool, dividend reinvestment plans and direct stock purchase plans allow investors to buy stock without a middleman broker. Many larger corporations offer DRPs or DSPs that allow you to make investments as small as $20. The best way to grow your money with these plans is to buy often. To that end, many of the plans can establish automatic payment arrangements, deducting funds from your bank account at preset intervals. Over time, small investments can add up to a wad.
Mutual funds are companies that pool investor monies and invest them typically in stocks, bonds or both. Funds may include the stock of companies in a certain industry, or of a certain size. Alternatively, funds may be composed of stocks from a range of emerging-market countries. Mutual funds are managed by professionals, so management fees, as well as other operating costs, are inevitable. In general, you'll want to find a fund with the lowest costs.
An index fund is a type of mutual fund that is tied to the performance of a stock index, such as the Wilshire 100 or the Standard & Poor's 500. According to the Motley Fool, index funds are known to yield a return of around 10 percent each year. In addition, they are typically commission-free. Because stock indexes include a broad range of companies, index funds are a road to instant diversification.
Certificates of deposit allow banks to borrow money for a stated period of time. When the bank returns your money at the end of the CD term, you also get interest. As of 2012, CDs are not offering extremely high returns. The more money you invest and the longer the term of the CD, generally speaking, the better the yield. As of 2012, a 20-year $100,000 CD may yield as much as 4 percent to 5 percent. On the other hand a five-year CD with a $1,000 minimum might return as little as 1 percent to 2 percent. Moreover, if you withdraw money from a CD before the term ends, you are subject to penalties.
Individual Retirement Accounts are tax-advantaged retirement savings plans for those with earned income. When you open an IRA, you can choose to invest the funds in stocks, bonds, mutual funds, even gold or real estate. The benefit lies in the tax savings. The contributions you make to a traditional IRA, you can deduct when you file your yearly tax return. The Roth IRA does not allow deductions on contributions, but when you withdraw your principal and interest at retirement, you pay no tax on any of it. Moreover, you can withdraw your Roth IRA principal at any time, regardless of age. Of course, you can only contribute so much to an IRA each year. The limit, as of 2012, is $5,000 ($6,000 for savers 50 and over).
- What Is the Difference Between a Money Market Fund & a Certificate of Deposit?
- The Difference Between a Savings Bond & Certificate of Deposit
- The Differences Between CDs and Money Market Accounts
- Money Market Vs Certificates of Deposit
- Compound Interest vs. Annuity
- What Is an IRA Cash Reserves Account?
- How Quickly Will a Mutual Fund Multiply?
- Alternatives to Money Market Funds