Saving and investing money is a vital part of anyone’s financial planning. Your reasons for wanting to invest money for interest may range from putting a little aside for a rainy day to balancing a growth-oriented stock portfolio with low-risk income producing securities. Whatever your purpose, it’s a big help to know what interest-bearing investments are available and where to get them.
Banks and Credit Unions
Any bank or credit union offers federally insured savings accounts and certificates of deposit. Savings accounts generally have low interest rates, but you can usually open one with just $250 to $300. Some banks offer student accounts that require as little as $100 to start. You can make a limited number of withdrawals each month as long as you keep a minimum balance. CDs are fixed-rate time deposits. You get a guaranteed interest rate for a period of time, ranging from three months to five years. In return, you agree to leave the money on deposit until the maturity. Interest rates are significantly better than for savings accounts.
U.S. Series EE and I savings bonds can be bought online from TreasuryDDirect.gov. Alternatively, you can buy paper EE and I bonds at banks and most other financial institutions. The electronic versions are sold at face value in denominations of $25 and up, with a $5000 yearly limit. Paper bonds are sold at a discount, usually 50 percent off the face value. Denominations start at $50, and the bond reaches face value at maturity.
A money market account pays interest on funds you invest. Your deposits are used by a money market fund to buy short-term corporate or government bonds with average maturities of 90 days or less. Money market accounts with banks or credit unions pay rates at levels between those of savings accounts and CDs. Investment firms such as Fidelity, Charles Schwab and Vanguard also offer money market accounts. These may pay higher interest but tend to have higher minimum balances. Typically, a money market account at a bank requires $2,500, while some investment firm accounts may set minimums as high as $25,000. However, you have access to your money and can even write checks on the account as long as you stay above the minimum balance.
Corporations and governments use negotiable bonds to borrow money and pay a fixed sum called the coupon rate. Typically, bonds have face values of $1,000 or $5,000 and maturities of up to 30 years. Bonds are traded like stocks, and their price fluctuates, mainly in response to changes in prevailing interest rates or in the credit rating of the bond issuer. Bond interest is usually called the yield and is determined by dividing the coupon rate by the price you actually pay for a bond. Bonds should be researched as carefully as stocks, and you can buy them the same way by placing an order with your broker.
Some mutual funds invest in negotiable bonds such as those discussed above and are designed to produce income rather than equity growth. Called an income fund, this type of mutual fund pays the interest earned on a regular basis, or you can leave earnings in the account to be reinvested. Although a mutual fund charges fees that come out of the interest you earn, you have the advantage of investing in a professionally managed portfolio that reduces risk through diversification. You can open a mutual fund account directly with the fund provider, through a broker or often through your bank.