Bank Savings Accounts
Banks offer personal savings accounts with low initial deposit requirements. If you shop around, you can find one that requires $100 or less to open. Some savings accounts have a monthly fee unless you keep a minimum balance, but others do not. You can add to your savings in any amount once the account is set up. Savings accounts don’t pay much interest, but banks also offer certificates of deposit and money market deposit accounts that give you a better return. These higher-yield accounts typically have larger minimums and withdrawal restrictions. For instance, early withdrawal of money from a CD typically carries an interest penalty. One option is to start with a personal savings account and transfer money to a CD or money market account as you accumulate funds. Bank accounts are insured to $250,000 by the Federal Deposit Insurance Corporation, so your money is very safe.
Financial institutions create mutual funds by selling shares to investors. The money raised is pooled under the management of an investment professional and used to invest in stocks, bonds and other securities. Some mutual funds feature initial deposit requirements of $1,000 or less. Investment earnings are passed on to you minus fees the fund charges to cover its expenses. You can earn more than you’ll get with a bank account, but there is risk. Mutual funds aren’t insured. If the stocks or other securities fall in value, you can lose money. Every mutual fund publishes an annual prospectus that states its fees and describes its performance history. Use the prospectus to compare different funds and pick the one that reflects your budget and your risk tolerance.
Buy Stock Direct From Companies
Some publicly traded companies sell stock directly to investors who want to avoid broker’s fees. Direct stock purchase plans are accounts you can open with initial deposits that typically range from $250 to $500. Some firms waive the initial investment if you set up automatic debits from a bank account of $25 to $50 each month. You earn money if the stock pays dividends and if the share price goes up.
Individual retirement accounts and employer-sponsored 401(k) plans are retirement savings accounts that help you save by giving you tax breaks. With traditional IRAs and 401(k) plans, you can deduct what you save on your tax return. You don’t pay any taxes on savings or earnings until you withdraw money. A 401(k) can be especially good because some employers add a percentage of what you save to the account. For example, your employer might kick in 25 percent of what you contribute. You can add up to $5,500 to an IRA or $17,500 to a 401(k) each year. There’s normally a penalty if you take money out before you are 59 1/2 years old. Another option is a Roth IRA or 401(k). You don’t get a tax deduction for Roth contributions. However, all money withdrawn from Roth accounts after you are 59 1/2 is completely tax free.