A penny saved is a penny earned. At least that’s what Benjamin Franklin said three hundred years ago. Sounds like good advice, but what’s the best way to do it?
If you save your pennies or dimes or dollars in a jar in the closet, you may think that your money is safe. Perhaps, but you’re actually losing money! Why? Inflation makes money less valuable over the years. Inflation, according to the generally accepted definition, is an increase in the general level of prices over time, and it results in a decline in the real buying power of money. When the general level of prices rises, each dollar buys fewer goods and services.
Say your jar of cash totals $50 this year, with which you can buy ten loaves of bread. But next year those same ten loaves of bread will cost $52. You’ve still got the same $50 in your jar--so for all practical purposes you’ve lost two dollars!
The standard rate of inflation is four percent. This means that if you have one dollar this year, you will need $1.04 next year to buy the same amount of goods and services. If you have only the same dollar, you’ve lost buying power.
What’s a diva to do? You
want find a balance between security--making sure you don’t lose your money--and
making it grow by investing it, which represents risk. Anytime you take your
cash out of the jar and give it to someone else to invest, you’re adding the
element of risk.
The safest way to save
is with a federally insured savings account. The Federal Deposit Insurance
Corporation (FDIC) is an independent agency created by the Congress that
maintains stability in the nation’s financial system by insuring deposits,
examining and supervising financial institutions, and managing receiverships.
To check whether your bank or savings association is insured by FDIC, call
toll-free 1-877-275-3342 or check the FDIC.gov website.
The basic FDIC insurance
limit is $100,000 per depositor per bank. That means that you can deposit up to
$100,000 in a checking, NOW or savings account, money market deposit account,
or certificate of deposit (CD), and you will be reimbursed if the bank fails.
If you want to insure a sum greater than $100,000, then divide it between two
or more banks.
Simple savings accounts
generally pay between three and four percent. Sure, they’re fully insured, but
you’re barely making enough income to compensate for inflation. You’re paying
for convenience and stability. Long-term certificates of deposit, which may
require you to keep your money in the bank for two to five years, may pay
between four and five percent interest. There will also be a minimum deposit
required--often as much as $10,000 for a four-year CD paying five percent
interest. CDs are appealing because they are FDUIC insured.
U.S. government savings
bonds such as Series I bonds can pay up to eight percent interest. The
government issues press releases that report on interest rates for various
types of bonds at treasurydirect.gov.
You may wish to consider
investing in a bond fund, which is a managed pool of U.S. government bond funds.
These funds invest in debt securities that are issued by the United States
government and its agencies. The funds invest in such debt instruments as
Treasury bills, Treasury notes, Treasury bonds, and mortgage-backed securities
issued by government lending agencies such as Fannie Mae. These funds are
regarded as the safest of the bond funds because the underlying securities are
backed by the full faith and credit of the United States government. Remember,
however, that the government does not back the fund itself.
Risk versus reward--the
more you risk, the greater the potential reward. Experts say that it’s wise to
keep enough cash in the bank to live on for three months, and additional funds may
be wisely invested in riskier areas such as the stock market.
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