We all know that money can be used to buy things, and money can also be used to make more money. Whether you’re just starting from scratch or have some money stashed away, when you begin to save and invest, you will be able to put yourself on the road to financial wealth. By creating wealth you can achieve your long-term financial goals.
Many people use the words savings and investing interchangeably. Both play an important role in your financial plans but these words have very unique concepts. It’s important to understand the difference between them and the need for each. In the first part, we will look at savings and the different options you have.
Savings is the building block in helping you to create the capital needed to feed your investments that can ultimately bring you wealth in the future. Savings should always come first and it usually means putting money away in a bank. As a general rule, especially in today’s economic climate, your savings should be sufficient to cover all your personal expenses such as rent, phone, insurance, food, clothing, and other unexpected expenditures for at least six months.
Having six months of accumulated savings for personal expenses will provide you the financial cushion needed in the event you lose your job without having the pressure that comes from living paycheck to paycheck. Savings should also be available for making specific purchase in the near future like purchasing a computer, furniture and car.
Savings will provide you with a low fixed rate of return and you can generally withdraw your money easily whenever you want. In addition, your money is safe which means you will not lose your money because the Federal Deposit Insurance Corporation (FDIC) guarantees the safety of your savings deposit of up to $250,000.00 per bank if an FDIC insured bank fails.
Savings can include the following type of accounts:
• Savings Account: are offered by banks. The bank lends your money to people and businesses that need loans. In return for using your money, the banks pays you interest. You can withdraw your money at any time.
• Certificates of Deposit: is a bank account that pays a higher rate of interest than a savings account. You will earn a predetermined rate of return with the condition you do not withdraw your money for a certain period of time, such as 3 months, 6 months, 1 year, etc. If you decide to withdraw your money before the predetermined period, you will have to pay a penalty.
• Money Market Account: is another type of a bank account that resembles a checking account and a savings account. It generally pays a higher rate of return than a regular savings account but lower than a Certificate of Deposit. You must maintain a minimum balance ranging anywhere from $500 – $2,500 or more or pay a fee if you go below it. You can write checks against the funds, however, there is a limit on how many checks you can write per month (most banks will allow only three checks per month) without incurring additional withdrawal charges.