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Savings Options

Now that you know about the benefits of saving and how money can grow, let’s look at the different types of savings and investment options available.

There are two types of tools to help you save and grow your money:

  • Bank account deposits
  • Non-deposit investment products

An important difference between the two is that your money in deposit accounts, such as savings accounts and CDs, is federally insured but investments are not.

With a deposit account:

  • You can make money by earning interest. The bank pays you for the opportunity to use your money.
  • Your money is safe. Since the creation of the FDIC in 1934, no depositor has ever lost one penny of insured deposits.
  • You have easy and quick access to your funds.

Savings Products

The three savings products available at most banks are savings accounts, certificates of deposit (CD), and money market accounts. It’s a good idea to build enough money in a deposit account that is protected by federal deposit insurance to cover unexpected or emergency expenses. Some experts suggest saving at least three to six months of living expenses in savings. By keeping the funds in an insured deposit account, you can be confident that your funds will be there and can be withdrawn when you need them.

Savings Account

A savings account is an easy and safe place to save money.

Certificate of Deposit (CD)

With a traditional FDIC-insured CD, you agree to keep the money in an account for a set term – a few weeks to several years. In return, the bank agrees to pay you a higher interest rate than you would receive from a checking or savings account. If you need the money earlier, you can arrange that but expect to pay an early withdrawal penalty.

Money Market Deposit Account

A money market deposit account is like a basic savings account. But, you often are required to keep a higher balance in the account to earn a higher rate of interest than you would in a traditional savings account.

Non-Deposit Investments

After building savings in a federally insured bank account, investments are a sound strategy to grow money over the long term.

An investment is a long term savings option that you purchase for future income or financial benefit.

When you invest money, there is a greater risk of losing it than if you put your money in a savings or other deposit account. In fact, there is a possibility that you might lose the entire amount you invest if the investment does not perform well. Investments are not federally insured even if you purchase them through a bank.

But when you invest, you also have the opportunity to earn more money. Investments are a good tool to try to grow money for the long term.

Investments can also help protect your money from inflation. Inflation reduces purchasing power. It is the concept that $10 buys more today than it will in ten years because prices may rise.

Types of Investment Products

A vast array of investment products exist, including stocks and stock mutual funds, corporate and municipal bonds, bond mutual funds, exchange-traded funds, and U.S. Treasury securities.

Savings Bonds

Bonds: When you buy a bond, you are lending money to the issuer (which may be a corporation or a state or local government) for a certain period of time, called a term. The corporation promises to repay the amount of money you are lending it on a specified date in the future. In addition, it may promise to make regular interest payments to you.

Note: You may lose money if the corporation fails to honor its promises.

U.S Treasury Securities

U.S. Treasury securities are offered by the Federal Government, and include:

  • I Savings Bonds: I Savings Bonds are purchased at face value, which is the amount printed on the bond. In other words, a $50 bond will cost $50. I Bond interest is composed of a fixed rate plus an inflation rate, which may change every six months. Interest is added to the bond monthly and is paid when the bond is cashed.
  • EE Savings Bonds: EE Savings Bonds are normally purchased at half their face value, so a $50 bond will cost $25. If you buy EE bonds electronically via, they are sold at face value. You will earn a fixed rate of interest that is set when you purchase the bond.

Savings Bonds must be held for one year before they can be cashed. However, if you redeem a bond before it is five years old, you will lose three months of accrued interest.

  • Treasury Bills: Treasury bills or T-bills are sold at a discount from their face value and range in terms from a few days to a year. For instance, you might pay $99 for a $100 bill. When the bill matures, you would be paid $100. The difference between the purchase price and face value is interest.
  • Treasury Notes: Treasury notes or T-notes pay interest every six months.
  • Treasury Inflation-Protected Securities (TIPS): Treasury Inflation-Protected Securities (TIPS) provide protection against inflation, and the interest rate is tied to the Consumer Price Index. TIPS pay interest twice a year.
  • Treasury Bonds: Treasury bonds or T-bonds pay interest every six months. They are issued for a 30-year term.


When you buy a stock, you own part of the company, called a share. A company that does well might periodically pay you dividends. Dividends are the portion of the company’s profits that it gives to you as a shareholder. The value of your investment changes according to the stock market. When you sell the stock, you may either earn or lose money.

Mutual Funds

Mutual funds are offered by companies that combine money from many investors to purchase numerous separate investments. The investment products in a mutual fund are managed by a professional and typically include numerous stocks and bonds.

By combining your money with the money of other investors, you can diversify even a small investment. Diversification is the concept of “do not put all of your eggs in one basket.” Diversification reduces the risk that you will lose your money because you spread the risk of loss across many savings and investment options.

Like stocks, mutual funds may pay dividends, and they may also gain or lose money over time.

  • Exchange-Traded Funds: An exchange-traded fund (ETF), like a mutual fund, is a company that pools money from investors to buy stocks, bonds, or other investments. Most seek to match the return of a particular market index.

Retirement Investments

Everyone hopes to lead an active, independent, worry-free life in retirement. But achieving these dreams takes money.

Several investment products are designed to help you save toward retirement:

  • Individual retirement arrangements (IRAs)
  • 401(k) and 403(b) plans
  • Variable annuities


An IRA, also known as an Individual Retirement Account, is the most basic kind of retirement arrangement.

  • With an IRA, you deposit money into an account, which may include a combination of stocks, bonds, mutual funds, or Treasury securities.
  • These types of accounts are tax exempt and generally designed to help ensure adequate income for retirees.
  • Though an IRA generally grows over time due to interest earned and your contributions, it may lose value depending on the stock market and your investment choices.
  • You should talk to an experienced investment professional for help making the best investments for you.

There are two main types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA is a personal savings plan that gives you tax advantages for saving for retirement.

  • Contributions to a traditional IRA may be tax deductible, based on the amount of your contribution and your income.
  • The earnings on the money in your IRA are not taxed until they are distributed (you withdraw them).
  • A traditional IRA can be established at many different financial institutions, including: banks, insurance companies, and brokerage firms.

A Roth IRA is also a personal savings plan, but operates somewhat the reverse of a traditional IRA.

  • For instance, contributions to a Roth IRA are not tax deductible, while contributions to a traditional IRA may be deductible on your annual income tax return.
  • However, while distributions (including earnings) from a traditional IRA may be included in income, the distributions (including earnings) from a Roth IRA are not included in income.
  • For both IRA types—traditional and Roth—earnings that remain in the account are not taxed.
  • A Roth IRA can be established at the same types of financial institutions as a traditional IRA.

IRAs can be thought of as either bank IRAs or brokerage IRAs.

  • Money deposited into an IRA at an insured financial institution (bank IRAs) is insured up to the maximum allowed by law.
  • However, investments made in other IRAs (e.g., stocks or bonds obtained through brokerage IRAs) are not federally insured, may lose value, and are not guaranteed by a bank (even if they are sold through an entity affiliated with the bank).

Your employer may offer a payroll deduction IRA. These plans enable you to authorize a payroll deduction for contributions to an IRA (either a traditional or a Roth IRA).

You may talk to your tax advisor for more details and/or review IRS Publication 590, Individual Retirement Arrangements (IRAs).

401(k) and 403(b) Plans

A 401(k) plan is a retirement savings plan established by an employer that lets its employees set aside a percentage of their pay for retirement before taxes are taken out. This can help lower your tax bill.

A 403(b) plan is a retirement savings plan for employees of public schools and certain tax-exempt organizations.

Characteristics of 401(k) and 403(b) plans include:

  • A maximum contribution limit each year—you can invest up to a certain amount of your own money, not counting interest earned
  • A penalty, or fee, on early withdrawal before age 59½, except in special circumstances
  • Portability—you can move the money into an IRA (called rolling over), or roll it over into a new 401(k) plan if you change employers
  • Choices—generally, you get to choose how to invest the money in your plan
  • Your employer may match a certain percentage of the money you invest in the retirement plan; not taking advantage of this match is like leaving free money on the table.

Variable Annuities

A variable annuity is an insurance contract that invests your premium in various mutual fund-like investments. It is usually sold by financial brokers and insurance agents as an investment toward retirement. The brokers and agents earn a commission on the annuity sold, and may be motivated to sell you something that may not be the best for you financially.

Variable annuities can be very costly due to the fees, which may include:

  • Annual fees
  • Surrender charges on early withdrawal and withdrawal over a certain percentage
  • Ten percent federal tax penalty on early withdrawal before age 59½
  • Life or living benefits fees that you pay to guarantee you get at least your original investment back at retirement

Often, you must hold the annuity for at least 10 to 20 years to justify the fees.