Published in: Banks | Nov. 20, 2018
By: Eric Volkman
If all goes well in our financial lives, we'll have a little extra money to salt away after we take care of our expenses. But having a nice pile of savings is only the beginning; we need to be smart about what we do with it.
Bearing that in mind, here are four relatively conservative financial instruments at our disposal that have the potential to not only preserve our treasure, but grow it as well.
A classic bank product, the CD account, is a store-and-profit investment. A customer commits to putting a certain amount of money into it for a certain stretch of time (called the "term"). In return for essentially locking their money away and not using the key for the agreed term, the customer receives interest on their funds.
Banks really, really don't want you to touch that money before the CD matures (i.e., the term ends). Nearly all CDs mandate heavy financial penalties for early withdrawal of funds. Another caveat to keep in mind with CDs is that they often require minimum deposits (although these tend not to be too burdensome; $500 or $1,000 is usual).
Available terms vary by bank and CD; they typically range from one month to five years. Generally speaking, the longer the term, the higher the annual percentage yield (APY). And those APYs are some of the most competitive among all banking products.
Note, however, that we're talking relative values here. We're still in an era of near-historic low interest rates, so even the best-earning CDs pay out at APYs around 3%.
The savings account, the classic bank product, is still pretty much the same as it was many decades ago. It's a repository for a money pile you want to build up, rather than spend. It pays interest, and although there are limits these days to the number of withdrawals of certain types you can make, it's more flexible and accessible than a CD.
High-yield (or high-interest) savings accounts are, as advertised, those that pay interest at elevated rates. They tend to impose higher opening balance minimums than their more basic siblings (which often have no minimum at all). High-yield accounts may also similarly have higher ongoing balance requirements.
One important catch with savings accounts, high-yield or otherwise, is that the law limits you to only six qualifying withdrawals and/or transfers per month. Fortunately, certain types of moves like in-person transactions made with a teller and ATM withdrawals do not count as "qualifying."
First things first: the money market account (MMA) is not, despite the similarity in name, a money market fund, which is an investable security on the stock exchange.
By contrast, the money market account is a type of bank account. It is, in several ways, a bulked-up savings account. Banks use the funds deposited in a MMA to invest in instruments that earn more interest than the traditional loans they fund with savings account balances.
As a result, the money market account tends to pay out at slightly higher rates than the basic savings account (the going APY for a relatively high-yielding MMA hovers around the 2% mark). It also tends to be more accessible, with banks commonly providing such instruments as debit cards and check-writing privileges to their MMA clients.
Since it's more or less an offshoot of the savings account, the money market account is also limited to six qualifying withdrawals and transfers every month. Fortunately, many of these are not everyday transaction types. The qualifying (i.e. restricted) ones include but aren't limited to:
Bond mutual funds are not the most exciting investments. After all, bonds are fairly steady financial instruments, and rarely see the volatility that certain hot stocks display.
They might not be satisfying for adrenaline fiends, but they can help line our pockets. Investment-grade bonds issued by some of your favorite companies are considered quite safe investments, thus a good place to park some of your funds.
When pooled together and guided by expert managers (typically veterans in the bond world), the returns on a good collection of bonds can be lucrative. It's not unusual to find large bond mutual funds boasting one-year returns of 4% and 5%.
This, even though interest rates have been rising steadily lately, and as per the Federal Reserve's strategy are likely to continue doing so (climbing rates tend to negatively affect the prices of outstanding bonds, which must be sold at a discount to make up for the widening gap in interest).
There are many good bond funds out there. It's recommended to seek out those that have consistently produced encouraging returns in the face of those Fed interest rate hikes.
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