Saving and Investing

Working and having a source of income through a job is indispensable to financial security but it’s really only the first step. The security that a paycheck provides is, at heart, temporary as it lasts only as long as the job lasts. Budgeting and planning can help you build up surplus income each month but transforming that income into wealth is achieved through careful saving and investing. Most financial institutions will offer several options for saving and investing your money. As you’ll see below, each option will have its own mix of risk versus return. Decide which is best for you based on your goals, your timelines and the composition of your financial portfolio.

Savings Accounts

Savings accounts are a very safe place to put your money. Your funds are insured and readily available in a branch or through an ATM. You will typically earn just a small amount of interest in these kinds of accounts, but because you can easily access the money you put away in a savings account, they are a natural choice for your emergency fund.

One downside to keeping a lot of money in a savings account is that the interest rate is unlikely to keep up with inflation. If you’re keeping a fairly small amount of money in the account, either for emergencies or a short-term goal, it probably won’t cause you much of a problem. If you have a larger balance and you plan to keep it long-term, an account with a larger return probably makes more sense.

Another challenge is that because your account is easily accessible, you may be tempted to use the funds for spending money or other expenses instead of saving for your goals. If this is the case, make sure to stick to your budget which will help keep you on track for your goals.

Certificates of Deposit (CDs)

Certificates of Deposit (CDs), much like savings accounts, are a safe and insured savings tool. You’re more likely to get a better interest rate with a CD than with most savings accounts, but unlike savings accounts, you commit your money to the account for an agreed-upon period of time in exchange for that higher return. Rates vary based on market conditions and the length of the CD term, with a longer term generally generating a higher rate of return. If you have an emergency and need to get your money before the agreed-upon period of time, you’ll be hit with an early-withdrawal fee and may forfeit the earned interest.

Money Market Accounts

Money market accounts are savings accounts that typically provide a higher rate of return, but may also require a larger balance. You may also have some check writing ability from these types of accounts.

Individual Retirement Accounts (IRAs)

These are long-term retirement investment accounts. The earnings on these accounts grow tax-deferred. Aside from in a few special scenarios, you can’t access the funds until you are of retirement age without incurring penalties and tax consequences.

type of BANKING institution

There are a lot of choices when it comes to picking the right financial institution – national vs. local, online vs. traditional, bank vs. credit union. They each have their pros and cons. The articles below outline points to consider before selecting a banking institution:

How to Choose the Best Bank for You
The Pros and Cons of Banks vs. Credit Unions
(Note: MIT students and staff are eligible to join the MIT Federal Credit Union)

ways to invest your money

You may think that putting money into a savings account or a CD is enough and it usually is – for the short term. In the long term, investments usually provide much higher rates of return than savings accounts and CDs but come at the cost of higher risk. Diversifying your holdings to balance risk and return is an integral part of a successful financial portfolio. Several types of investment vehicles are described below.

stocks, mutual funds, Exchange traded funds (ETFs)

Stocks, mutual funds, ETFs and the like are known as equity assets. They are securities in which the holder holds a share in a company or other account. These are riskier than bonds or cash equivalents, because they fluctuate in value, and can therefore produce variable income.

Further reading:
Everything You Need to Know About Investing
Slow and Steady with Equity and ETFs
Are Stocks a Good Long-Term Investment?

bonds

Bonds are a form of debt. You, the bondholder, are giving money to a company or government in exchange for a fee (the interest).The bond pays off a specific amount over a set time and does not fluctuate with the market in the same way stocks do. Bonds fair slightly better than savings accounts and CDs by providing at least a return of 2% annually and are by far-and-away the most popular investments especially among older, more risk-adverse investors.

Further reading:
The Types and Risks of Bonds

real estate

Homeownership can build wealth by allowing you to build equity. Home equity is defined as the market value of your home minus the amount you owe on it. As you pay off your mortgage and as your home value increases, your equity increases. Building home equity can be equated to a long term investment. Like any investment, homeownership comes with risks. Because real estate is a long term investment, property taxes, home repairs, and regular maintenance must be factored into your costs and may cut into your investment returns. Home equity can also go down during a housing bust. Building home equity is often described as a slow climb but investing in real estate may make sense in some situations and can offer diversity to your portfolio.

Further reading:
Tips for Beginning Real Estate Investors
6 Ways to Build Home Equity [Nerdwallet]

Additional resources

Everything you need to know about banking
Figuring out finance: basic savings, money market accounts, CDs
Are you losing money in a Savings Account?
Best online savings accounts
Let’s Dive In: Stocks, Bonds, Mutual Funds Webinar
Webinar: Investing Basics – It’s Not a Sprint, It’s a Marathon!