Whether it is your retirement funds or just your rainy day fund, having money in savings is a good thing. But deciding where to stash your cash can be a challenge. Balancing availability of your money with getting maximum yield takes planning.
Let’s start with some basics. Most of us park our savings in stocks, mutual funds, bonds, certificates of deposit, money market accounts and savings accounts. What do each of these mean?
Stocks allow you to buy a part of a company. If you own stocks in Coca-Cola or in Google, you are an owner along with thousands of other folks. This is a good place to put long-term investments such as your retirement dollars.
Mutual funds are actually an investment in the stock market as well. Your money is pooled with that of others to buy stocks, bonds and other investments. Mutual funds are generally less risky than individual stocks but are still best for long-term investments like retirement funds.
Bonds are a loan, but a safe one. You are loaning your money to a government or a company. One of the safest bonds is a U.S. treasury bond. These should be used for savings that you intend to leave from three to five years.
Money markets yield a bit more money than a basic savings account, but you usually must have a large amount of money to start an account. Again, this is best for a three- to five-year investment.
Certificates of deposit (CDs) require you to put in a set amount of money for a set length of time. You are guaranteeing that you won’t touch the money for three months, six months, up to several years. It pays a bit more than a basic savings account and should be for longer than a year investments.
A basic savings account is the most fluid of all. You can put in or take out money at any time. In return for this accessibility, you get a lower return on your investment.
In terms of risk, stocks are the riskiest, followed by mutual funds, bonds, money markets, CDs and a savings account. Balancing the risk and yield is a challenge that must be weighed. Most experts recommend that you analyze your own tolerance for risk and consider your age when talking about what type of investments you should make.
However, everyone should have a savings account to cover those unexpected expenses that come up from time to time. Recent research shows that the average family emergency costs about $2,000 — an expected medical bill, automobile repair or a house repair. Make sure your family has at least that much in case something goes wrong.
Regardless of how you stash your money, make sure you are keeping some money for a rainy day. Heed this sage advice, however, about rainy day funds. Jane Bryant Quinn, a celebrated money expert said, “The shortest period of time lies between the minute you put some money away for a rainy day and the unexpected arrival of rain.”
Roxie Rodgers Dinstel is associate director of Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at email@example.com or by calling 907-474-7201.