Bill Gerhard: Hi! I am Bill Gerhard, Director of Financial services for AAA. Today's discussion of building a sound saving strategy focussed on types of saving vehicles.
Most people are familiar with savings accounts. You deposit money into an account that earns a fix interest rate. Typically the interest rate is not high, but these accounts are convenient, because you have immediate access to your money.
A money market deposit account with a bank or credit union is a type of savings account that pays higher interest than a typical savings account. However, race can change as often as daily for both savings accounts and money market deposit accounts. Federal guidelines limit the number of times a month you can pay a third party from the money market deposit account. You can always have access to your money with no penalties.
One caution; a money market account can be offered by mutual funds. These money market accounts are not federal insured against loss of principal. A certificate of deposit or CD is a bank or credit union product that lets you choose the length of your investment, and in return you are locked into a fixed interest rate. This makes your earning predictable. So a CD is a low risk investment.
There are also variable rate CDs with interest rates that can change, but your principal is still secure via FDIC or NCUSIF. So variable rate CDs can still be considered a low risk investment.
An annuity is life insurance contract that provides an opportunity to earn money that is not taxed into earnings or distributed. The security of this practice is based solely on the issuing insurance company.
An IRA is an Individual Retirement Account that provides some tax advantages. There are two types of IRAs. A traditional IRAs is funded with pretax dollars and a Roth IRA is funded with post tax money. I hope you now have a better idea of the ranges saving vehicles that might be right for you.
Talk with a financial professional to find the right savings vehicles or combination of investments that can help you meet your financial goals. Go short in long terms. AAA offers the information in this video series for educational purposes only. Carefully consider objectives, risk, expenses and tax implications, before investing.
In our next, video we'll look at where to go to open an account.