Where to Stash Your Cash

As you start saving, you will have the option of where to keep your money. Here are some of the most popular choices.

Piggybank. You can keep your money at home where you can get to it easily. But your money will not earn any interest, and if it is lost or stolen, you are out of luck. It is better to open a deposit account.

Savings accounts. Basic savings accounts usually have low minimum deposit requirements and are easy to open. (At credit unions, savings accounts are called share accounts.) They may pay interest. These accounts are usually liquid, which means it is easy to access your money when you need it without penalties. Watch out, though. If your account is too easy to access you may find yourself sabotaging your savings plan!

Internet-based bank accounts. These savings and checking accounts often pay higher interest rates than those available at brick-and-mortar bank branches. The rates rise and fall with the bank-to-bank lending rates set by the Federal Reserve Board. In addition, you can find accounts with no minimum balance requirements and no fees. To protect yourself, check here to make sure an Internet site offering a high-yield account is a legitimate bank and that deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

Certificates of Deposit (CDs). With a CD, you deposit a certain amount of money (usually a minimum of $500–$1,000) for a fixed amount of time, ranging from three months to three years or longer. CDs earn a fixed yield if not cashed in early; the longer you leave the money in the account, and the larger your deposit, the higher your yield. You can shop among banks, credit unions and investment companies for the best CD rates and terms. Watch out: If you cash in your CD early, the penalties may be steep.

Money market accounts. These savings (or checking) accounts typically offer a higher rate of return than your basic savings or checking account, but you usually need a minimum deposit or average balance of at least $2,500 or more. (The minimum amount will vary by financial institution.) They are usually very liquid, meaning you can access the cash very quickly. Watch out for steep penalties if you do not keep enough money in the account.

Money market funds. These are mutual funds that typically invest in short-term bonds or other low-risk investments.

U.S. Savings Bonds. You can buy Series EE or Series I savings bonds for as little as $25–$50 when buying through financial institutions. They’re lower risk than most investments since both principal and interest are guaranteed by the full faith and credit of the United States, and lost, stolen or destroyed bonds can be replaced. You can buy savings bonds through most financial institutions, through payroll savings plans and through Treasury Direct and its payroll feature. There are no commissions or similar fees. Interest is exempt from state and local income tax and federal income taxation can be postponed until you cash your bond or until it stops earning interest in 30 years. Watch out, though. If you cash them in early you will lose interest income and your returns over the long run may be low compared with other investments.

Tip: Are you holding onto older savings bonds and wonder what they are worth? You can download the free Savings Bond Wizard to manage your savings bonds and determine their worth.

Bonds. Private companies and government agencies will issue bonds, which are essentially IOUs. That means when you buy a bond, you are lending money to the issuer of the bond. Just like people, some issuers are better credit risks than others. The safest bonds are rated AAA. You earn interest while you hold the bond and get paid back when the bond “matures.” Some bonds are risky, however, and it is possible you can lose the money you have lent. You also can lose money if you cash in a bond early. Finally, what may seem like a good interest rate when you buy the bond may look too low if other interest rates go up.

Stocks. When you buy stock in a company, you are buying ownership in that company. When a company does well, the stock price goes up and the company may distribute a portion of its profits to shareholders by paying a dividend. A stock is only worth what other investors are willing to pay for it, and prices can change from moment to moment. You can lose money investing in stocks, but you also can make money.

Mutual funds. With a mutual fund, you simply pool your money with other investors and invest with a certain objective (maximum growth, for example, or income). The manager of the fund, which could be an individual or a team, is responsible for investing the money to meet the fund’s objectives—and some do a better job of that than others. Mutual funds usually invest in dozens or hundreds of stocks and/or other investments. This diversification tends to make them less risky than buying a few individual securities.

FDIC insurance. The FDIC is a government agency that protects your savings accounts if your financial institution fails. Most deposit accounts are covered up to $100,000 for each person in one financial institution. As of April 1, 2006, coverage was raised from $100,000 to $250,000 of deposit insurance for retirement accounts—the combined total of the traditional and Roth IRAs (Individual Retirement Accounts), self-directed Keoghs and certain other retirement accounts an individual may have on deposit at an FDIC-insured bank or savings institution. In general, self-directed means the consumer chooses how and where the money is deposited.

Note: FDIC insurance coverage for self-directed retirement accounts applies primarily to certificates of deposits or “CDs,” which are deposit accounts typically held for anywhere from one month to five years. These accounts also are insured to $250,000 separately from any other deposits you may have at the same institution. The FDIC does NOT insure investments that are not bank deposits—for example, mutual funds, stocks, bonds, life insurance policies and annuities—even if you purchased them from an FDIC-insured institution.

Credit union accounts are covered by the National Credit Union Administration at similar limits.

Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts.

Instead of investing assets in a lump sum, you work your way into a position by slowly buying smaller amounts over a longer period of time.

This spreads the cost basis out over several years, providing insulation against changes in market price. However, dollar cost averaging does not guarantee a profit, since your return depends on the market value of the securities when you sell them.

In order to begin a dollar cost averaging plan, you must do three things: