|
|
| |
|
Types of Savings and Investment Options
It's the variations that legalities bring forth that make investment and savings options dreaded by most of us; therefore, to increase awareness, we brought them down under four primary heads, of which, the last is meant to serve educational purposes only. Thus, we shall keep the discussion limited under the first three.
Emergency Reserve Fund:
As the name suggests, an emergency reserve fund serves for emergencies and after the purpose is solved, it's replenished again. This is not to be confused as a long-term investment.
A family can afford an emergency reserve fund irrespective of their financial status; even as little as $5 a week adds up to huge amounts later. The ideal goal should be to accumulate an amount equaling 12-weeks' income, but 24 weeks cuts the risk factor out. To house an emergency reserve account, a person may avail the services of - i. Banks, ii. Credit unions iii. Mutual funds.
However, banks do not pay a high percent of interest though stays the most convenient option; Credit unions are an excellent alternative to banks and are as much safe and provide slightly higher interests rates whereas mutual funds, though pay interests that are higher by 1 or 2 percents, carry slightly greater risks as well.
Accumulation Fund:
These suffice for large and unexpected expenses and hence, are long-term emergency funds. Ranging between one and five years, liquidity of the account is less important than the higher returns. They come under four options:
- CD (certificates of deposit): These are chosen for the safety and returns they offer but have almost no flexibility i.e. early withdrawal penalties.
- Ultra short-term bond funds: The money kept in such accounts can't be touched for six months to one year but have an almost nil-volatility with reasonable interest rates.
- Short-term bonds: Same as the above, only the money should not be touched for two to three years. Offer better returns but slightly increased volatility.
- Mortgage-backed bond funds: For those who can make an investment and forget about it for at least four years. Attractive yields and monthly dividends being the strongest points, the dividends make possible any sort of re-investments.
Long-Term Investments:
Why go for one? Because, they allow for:
- A greater degree of security.
- Can be inherited.
- Comply with fund retirement.
Not to be considered a get-rich-quick scheme, long-term investments last and grow for many years and can be categorized under five heads, namely:
Secure income investments (e.g. government securities); long-term income investments (e.g. mortgages, municipal and corporate bonds, stock dividends etc.); growth investments (undeveloped properties and balanced mutual funds); speculative investments (common stocks, precious metal etc.) and high-risk investments (oil and gas, collectibles, gems, limited partnerships or commodities).
So maintain a budget, be disciplined and save; with all three in their right places, no storm shall be strong enough to uproot the family tree. For that, an emergency reserve account should be given the first preference whereas the latter shall follow over time.
| |
|
|
