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Save and Invest

Save and Invest
You have budgeted and identified an amount to save monthly. Where are you going to put your savings? By investing, you put the money you save to work making more money and increasing your wealth. An investment is anything you acquire for future income or benefit. Investments increase by generating income (interest) or by growing (appreciating) in value. Income earned from your investments and any appreciation in the value of your investments increase your wealth.

Get Guidance
There is an art to choosing ways to invest your savings. Good investments will make money; bad investments will cost money. Do your homework. Gather as much information as you can. Seek advice from personnel at your bank or other trained financial experts. Read newspapers, magazines and other publications. Identify credible information sources on the Internet. Join an investment club.

Tools for Saving
The simplest way to begin earning money on your savings is to open a savings account at a financial institution. You can take advantage of compound interest, with no risk.

Financial institutions offer a variety of savings accounts, each of which pays a different interest rate. The box below describes the different accounts. You can choose to use these typical accounts to save for the near future or for years down the road.

Types of Savings Accounts

Savings account (in general)

  • Access your money at any time.
  • Earn interest.
  • Move money easily from one account to another.
  • Have your savings insured by the FDIC up to $100,000.

Money market savings account

  • Earn interest.
  • Pay no fees if you maintain a minimum balance.
  • May offer check-writing services.
  • Have your savings insured by the FDIC up to $100,000.

Certificate of deposit (CD)

  • Earn interest during the term (three months, six months, etc.)
  • Must leave the deposit in the account for the entire term to avoid an early-withdrawal penalty.
  • Receive the principal and interest at the end of the term.
  • Have your savings insured by the FDIC up to $100,000.

Invest for Retirement

Individual Retirement Accounts

An individual retirement account (IRA) lets you build wealth and retirement security. The money in the IRA grows tax-free until you retire and are ready to withdraw it. You can open an IRA at a bank, brokerage firm, mutual fund or insurance company. IRAs are subject to certain income limitations and other requirements you will need to learn more about, but here is an overview of what they offer.

You can contribute up to $3,000 a year to a traditional IRA, as long as you earn $3,000 a year or more. A married couple with only one person working outside the home may contribute a combined total of $6,000 to an IRA and a spousal IRA. Individuals 50 years of age or older may make an additional "catch-up" contribution of $500 a year, for a total annual contribution of $3,500. Money invested in an IRA is deductible from current-year taxes if you are not covered by a retirement plan where you work or your income is below a certain limit.

You don't pay taxes on the money in a traditional IRA until it is withdrawn. All withdrawals are taxable, and there generally are penalties on money withdrawn before age 59½. However, you can make certain withdrawals without penalty, such as to pay for higher education, to purchase your first home, to cover certain un-reimbursed medical expenses or to pay medical insurance premiums if you are out of work.

A Roth IRA is funded by after-tax earnings; you do not deduct the money you pay in from your current income. However, after age 59½ you can withdraw the principal and any interest or appreciated value tax-free. Other rules for withdrawing money from a Roth IRA are less stringent than those for a traditional IRA.

An education IRA is an educational savings account, not a retirement account. A parent, grandparent or other person can contribute up to $2,000 annually to an education IRA on behalf of a child under the age of 18. The big advantage of an education IRA is that withdrawals are tax-free if they are used for qualified postsecondary educational expenses, such as room, board and tuition. The money contributed to an education IRA is not tax-deductible.

401(k) Plans

Many companies offer a 401(k) plan for employees' retirement. Participants authorize a certain percentage of their before-tax salary to be deducted from their paycheck and put into a 401(k). Many times, 401(k) funds are professionally managed and employees have a choice of investments that vary in risk. Employees are responsible for learning about the investment choices offered.

By putting a percentage of your salary into a 401(k), you reduce the amount of pay subject to federal and state income tax. Tax-deferred contributions and earnings make up the best one-two punch in investing. In addition, your employer may match a portion of every dollar you invest in the 401(k), up to a certain percentage or dollar amount.

As long as the money remains in your 401(k), it's tax-deferred. Withdrawals for any purpose are taxable, and withdrawals before age 59½ are subject to a penalty. Take full advantage of the retirement savings programs your company offers—and understand thoroughly how they work. They are great ways to build wealth.


Used with permission from the web site of The Federal Reserve Bank of Dallas.

Copyright 2002. All rights reserved.

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This content was last modified on: 07/22/2008

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