Saving and investing money is an essential part of planning for the future. Whether it's your own retirement or a child's college education, setting money aside and trying to make it grow in value is often the only way to pay for expenses that exceed your income. Thankfully, you have many options to choose from when it comes to investing and saving money. The best option is likely a combination of products that balance risk with the potential for growth.
Savings accounts are among the most basic ways to save money. All banks offer them, usually for free. Your money earns interest each month, and you may be able to use the account to write checks or make automatic electronic payments. The federal government insures savings accounts, meaning that your money is extremely secure, even if the bank itself struggles financially.
Certificates of deposit are another savings option offered by most banks. CDs are long-term savings accounts into which you place a given sum of money for an agreed-upon time, often five or 10 years. CDs earn more interest than savings accounts, but the money is unavailable to you until the CD reaches the end of its term.
Stock is among the most common investment. A share of stock represents ownership of a company. Stockholders can vote on company issues and buy or sell shares through a broker and a stock exchange, which is a marketplace for stocks. Stock is typically volatile, which means its value can rise or fall rapidly. Owning many different stocks can balance out this risk.
Bonds are considered a safer investment alternative to stocks for the most part. Governments and corporations issue bonds. The entity represents a promise to repay a loan, which each investor makes when buying the bond, at a predetermined interest rate over a period of time. At the end of the period, the bond issuer pays back the principal, or purchase price, and interest of the bond.
A mutual fund is an investment product that uses stocks to earn money for a large group of investors. The fund's manager pools money from investors and uses it to buy many stocks. Some mutual fund managers buy and sell shares of stock daily or even hourly. Mutual funds vary in their degree of risk, as well as the cost to investors, who must pay for the fund manager's expertise and efforts. A well-managed mutual fund can provide the benefits of stock investing without as much risk.
Real estate is another type of investment. While most homeowners hope that their own homes' values will rise, real estate investors buy land or rental property with the expectation of selling it in the future. Rental property provides income from tenants, but also requires management and maintenance. Investing in real estate also makes you responsible for property taxes on the land you own. Real estate investing can be risky since home prices and rental demand are always subject to change.
Investing in commodities involves predicting the future price of a product or resource. Commodities investors buy futures contracts, which represent the right to buy a commodity, such as crude oil, corn or wheat, for a set price at a given time in the future. If the commodity's price exceeds the amount on the contract, the investment pays off. Global supply and demand impact commodity prices, which makes investing in commodities a complex process with many variables.
Annuities are low-risk investments that require one-time or ongoing payments, and pay out a specified sum. Investors who purchase annuities hope to receive more in payments than they put into the annuity. An annuity may be structured to provide income during retirement, offering a predictable payment for life.