Investments and Interest Bank Accounts

Today I’m going to change things up a little bit and direct your attention toward personal finance and planning your financial future. As you know, there are always times of economic uncertainty – the key is not to be affected when they arise.

Preparation is critical if you want to be able to live comfortably once you stop working, or if you want to retire earlier than the majority. It’s also important when heavy expenses arise or when you’re looking to take a new step in your life, such as having children or buying a new home.

Some of the interest rates and APYs that I will mention below are taken from current market standings and may not be accurate at your time of reading. Such rates may not be available everywhere.

401(k) 403(b) and 457(b): Experts recommend that your first step toward planning for retirement be involvement in your employer-sponsored 401(k) plan. These plans, designed to help you save for retirement, allow you to take money directly out of your paycheck and have it deposited into your 401(k). No taxes will be paid on this money, or the interest it earns, until it is withdrawn.

Some employers will assist you by matching your contributions, though this is entirely optional. Most 401(k) plans are directed by the participant, which means you are responsible for selecting investment options for your money. Some investment options include bonds, mutual funds, and stocks. There are also places of employment that offer trustee-directed plans, in which a group of trustees has been appointed to allocate and invest your money.

Individual Retirement Accounts: IRAs allow you to provide for your retirement by granting you significant tax advantages. There are currently two different types of Individual Retirement Accounts: Traditional and Roth.

A Roth IRA is an account that is able to grow without being subject to taxes due to the fact that you only contribute money that has already been taxed. You are able to withdraw your money at any time without a penalty or taxes so long as your account has been open for at least five years and you have reached the age of 59 and a half. Direct contributions may be withdrawn at any time without being taxed. Note that the Roth IRA has several income restrictions.

A Traditional IRA grows in a tax-deferred manner, meaning that you will pay the taxes upon withdrawal. Withdrawals after the age of 59 and a half are taxed at your individual tax rate at that time. Your contributions may be considered tax deductible. If your contributions are withdrawn prior to being 59 and a half, you will suffer a 10% Federal Penalty, in addition to the taxation.

IRAs often grow by being invested in mutual funds, stocks, bonds, Certificates of Deposit, money market accounts and certain precious metals, such as Gold and Silver.

Let’s cover a few definitions before going any further:

Stock of a business is representative of capital that you have invested into it. It grants partial ownership of the business and its value fluctuates in relation to the success of the entity.

A bond is simply a debt security. The issuer of the bond agrees that he owes the holder a specific debt. Certain bonds have terms that may require the debtor to pay interest as well as the original principal when it reaches maturity.

Mutual funds are investment pools managed by qualified professionals. These funds collect money from a number of investors and then utilize the larger amount to produce a greater return. Mutual funds often find investment opportunities in securities such as bonds and stocks (mentioned above), money market accounts (mentioned below), or even a variety of commodities.

Standard Brokerage Account: My favorite Brokerage Account provider is Banc of America (the investment arm of Bank of America, which recently purchased Merrill Lynch). They describe the account as a “general investing account that helps you build and manage a diversified portfolio.” Such accounts typically allow you to place investments in mutual funds, bonds, stocks, and more.

Advantage with Tiered Interest Checking Account: This is a special checking account offered by Bank of America that earns a decent amount of interest on the balance of your account. It requires that you have a minimum balance of $10,000 – otherwise you’ll suffer a $25 fee. They offer holders of these accounts special rates on a number of other services, such as Certificates of Deposit and Individual Retirement Accounts.

Savings Accounts: The most common type of savings account is one that simply offers interest that is compounded daily and paid out monthly. Bank of America offers a ‘Regular Savings’ account that boasts 0.10% Interest and APY.

36 Month Certificate of Deposit (CD): Another example of a worthwhile CD I discovered is: A fixed 1.75% APY that allows you to withdraw your interest each month without facing a penalty. These accounts require a minimum of $1,000 to open.

High Yield CD: These accounts are designed for long-term savings without going so far as to last a 36 month period. In exchange for a shorter hold on your funds, you only receive 0.80% and are required to have $5,000 to open an account.

Money Market Account: A money market account deals in both short-term lending and borrowing. Many maturities have time frames of one year or less. Applicable investments may be treasury bills, bankers’ acceptances, commercial paper, CDs, federal funds and more.

PayPal offers a Money Market Fund that allows you to utilize your account balance to earn a return. They don’t hit you with any penalties, there are no minimum balance requirements, and you are free to withdraw your funds whenever you please. As of this post, they offer a 0.06% 7-Day Average Yield.

Another great option is the Bank of America Growth Money Market Savings Account: This requires you to have a minimum balance of $5,000 or more, otherwise you’ll face a $10 maintenance fee. The standard rate and APY are both set at 0.15 – however, you may be eligible for a rate bonus, which raises both of these numbers to 0.40% if you do any of the following each calendar month: “(1) an automatic transfer of $250 or more from your Bank of America checking account, (2) an automatic transfer of the monthly interest payment from your Bank of America CD, or (3) a direct deposit of $250 or more.”

So, discussion topics for this post:
Do you currently participate in any long-term savings or investment accounts?
How are you preparing for your financial future and stability?