5 Financially Responsible Ways to Invest in Your Future

We all know that spending money is more fun than earning it. And earning money is often more fun than putting it away for a rainy day – in fact, if you are reading this article, you may be one of the few Americans interested in saving money. Polls show that up to 78% of adults in the U.S live “from paycheck to paycheck,” and up to 65% have less than $1,000 in savings.

When struggling with money, the future may seem like a dark void with nothing in it. Thankfully, there is a wide range of investment options for people across the economic spectrum, and in most cases, it is possible to save up at least a little money. The key is not how much you invest, but how often you do it, and where.

In this article, we will survey several investment accounts you can open, and how they can build your future. But first, let’s talk about checking accounts.

Checking Account

The majority of Americans – not to mention a majority of the world’s population – use a basic checking account. For some people, this seems like a sufficient way to save money. But while it’s true that bank accounts accumulate interest and are insured by the FDIC, there is good reason to do more:

• A checking account has a very low Annual Percentage Yield (APY). The average is 0.06 percent.
• A checking account is very easy to withdraw from. Some people use a debit card for all their purchases, meaning a low balance can be wiped out with just a few careless swipes.

At the end of the day, a checking account is not meant for savings; it is designed for easy access to money that you aren’t afraid to use. Here are some accounts that are better for storing money:

Savings Account

In lieu of anything else, almost every bank that offers a checking account also offers a savings account. These work almost exactly like ordinary checking accounts, with two key differences:

• Savings accounts typically have a higher APY – on average, 0.25%.
• Savings accounts are not as easy to withdraw from. It typically cannot be used to make payments to merchants or retailers, preventing accidental transactions.

A savings account also has the key advantage of being easily accessible when needed, making it ideal for emergency funds. It is not, however, the best way to make returns on your money, since the APY is still relatively low.

Certificate of Deposit (CDs)

In addition to savings and checking accounts, most banks offer CDs, a unique type of investment account notable for having a “maturity date” – this is a fixed limit on when a CD can be withdrawn from, usually lasting between months and decades after opened.

CDs have several advantages over other investment options:

• Low risk, and reasonably good returns – CDs are insured by the FDIC, and range from the national average of 0.91% for 5 year deposits to 2.5% or higher.
• Reduced temptation to spend – CDs can be tapped prematurely in some cases, but there is a hefty fee which incentivizes patience.

A CD constitutes a fixed deposit (FD) account, meaning you cannot add any more money to it over time. Fortunately, many institutions that offer CDs do not have a minimum deposit requirement, meaning that almost anyone can open one.

Money Market Account (MMA)

Unlike CDs, MMAs are recurring deposit (RD) accounts, which means you can add money to them continually over time. There are several advantages to an MMA:

• On the higher end, MMAs can range from 1.5% to 2.2% APY with some variation. While lower on average than a CD, other benefits make up for it.
• MMAs are not only easy to withdraw from, but sometimes may even be issued with debit cards sometimes. Typically, withdrawals are limited by federal law to six times a month.
• MMAs often have a high minimum deposit ($1,000 or more), but however, higher deposits can sometimes fetch higher APYs.

Due to the high minimum deposit, withdrawal abilities, and good (but not amazing) APY, a Money Market Account is a solid choice for an emergency account that doubles as a reasonably good investment.

Individual Retirement Account (IRA)

When you put money into an IRA, you are not planning to withdraw for a long time (you must be 59.5 years old to avoid a penalty by US law). An IRA is typically better for serious long-term savings than any type of account mentioned so far:

• An IRA can be invested in stocks, and, with the S&P 500¹, yielding an average 7% APY when adjusted for inflation², investors could see returns much higher than those in savings accounts over time. Of course, stock-market returns vary wildly on a year-to-year basis and can involve the loss of principal. As a result, many IRA investors opt for a portfolio with a mix of assets³.
• Different types of IRAs are available for all tax-paying citizens, meaning they need not be obtained through an employer.
• Depending on income level, IRAs are completely or partially tax deductible (though this is not true of Roth IRAs)

The advantages of an IRA are obvious, but there are limits. Under the age of 50, one cannot contribute more than $5,500 per year. After that, one is capped at $6,600.

401(k)

A 401(k) is a nice perk offered by many employers. Like an IRA, it is difficult to withdraw, and meant for long-term savings. Whether it makes more sense to stash your money in a 401(k) largely varies from employer to employer, but there are good reasons to take it in many cases:

• A 401(k) is deducted directly from your paycheck, meaning that it’s automatic, dependable, and hard to spend frivolously.
• Employers often opt to match your 401(k) investment on a yearly basis, usually 50 cents to a dollar.
• While not tax exempt, 401(k)s are “tax deferred”, meaning any investments and earnings will not be taxed until they are withdrawn.

Peace of Mind

While it may be true that “money can’t buy happiness,” it does take the sting out of emergencies, nourish loved ones, and offer the chance for rest when one needs it most. If you’re living “paycheck to paycheck now,” think about how a tiny bit of money saved each year can change your future for the best.

The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual.  Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.

All investing involves risk including loss of principal.

¹ The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

² All indexes are unmanaged and cannot be invested into directly.

³ There is no guarantee that a diversified portfolio will enhance overall returns or outperform an undiversified portfolio. Diversification does not ensure against market risk.