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Types of Investments
 There are three basic areas where you can put your money.
Savings Vehicles:
Cash - This starts off easy enough…cash is, well, cash. Right? Yes. And no. In the world of investing cash doesn't just refer to the smooth green bills. It also includes investments such as: savings and checking accounts, certificates of deposit (“CDs”), and money market funds. Why? Well, because in a few important ways they are very similar to cash. The three main benefits of “cash” investments are:
- they are easy to access quickly (otherwise known as being “liquid”);
- they pose little risk so there's not much chance that you'll lose your original investment (“principal”); and
- they do earn a small amount of interest.
Savings/Checking accounts – Although it seems almost too elementary to mention savings and checking accounts as investment vehicles, they are the foundation of most people's savings plans. When opening a checking account, shop around. Banks want your business and will use checking accounts as a way of enticing you to bank with them. It shouldn't be difficult to find an offer for a free checking account that earns a small amount of interest for maintaining a minimum balance.
CDs – No, “CD” doesn't refer to the small round disc…it stands for “certificate of deposit.” Here's what you need to know about CDs:
- It's a deposit you make with a bank for a certain amount of time, usually between 1 month and 5 years.
- It pays a fixed rate of interest.
- CDs are taxable.
- It's guaranteed by FDIC insurance up to $100,000.
- The longer you're willing to invest your money, the higher the rate of interest you'll receive.
You should take into consideration that CDs aren't as liquid as some other cash investments. There's a penalty for early withdrawal, but the upside is that you'll get a higher interest rate for investing in CDs. Long-term CDs are ideal for investing toward a new car or an upcoming anniversary vacation. A good first step to investing your savings is to move some of your funds from your savings or checking account to a CD. You can choose between CDs that have an “automatic rollover” function meaning that they automatically roll over into another CD when they reach maturity, or you can choose a “single-date” CD. Once that CD reaches maturity the bank will call to let you know that you need to reinvest that money somewhere else – either into another CD, back into your savings or checking, or another investment vehicle like a bond or stock mutual fund.
Money Market Funds – Here's what you need to know about money market funds:
- They're essentially a large pool of money overseen by an investment company that invests only in very safe and liquid securities (such as CDs and IOUs/bonds from the federal government and large, reputable corporations).
- Most do require a minimum initial investment (usually $5,000).
- Most funds allow you to write a limited number of checks against your account per month.
- Unlike bank accounts and CDs, however, they are not insured by the FDIC.
Bottom line? Think of money market funds like savings accounts that earn interest monthly with little risk.
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