Savings Accounts and Stock Investments: Uses, Values and Differences

With an unstable economy, credit card debt and the pending collapse of Social Security, it is wise to decide early on how to maximize earnings.

Making the most of hard-earned money means giving more value to every cent netted. That means money is not spent on unnecessary things, and instead is allowed to grow over an extended period or is used to help resolve credit card debt.

There is a general consensus on how to grow money over time. Two of the most common approaches to maximizing money’s potentials are through a bank’s savings account and stock investments. Both approaches have the purpose of earning a return on money.

Savings Accounts

A savings account is a risk-free investment. It is a safe means of earning a modest rate on money that is always accessible. Also, while it earns interest that is taxable, it rarely causes a significant tax payment.

Usually, a savings account is used either for storing emergency funds or saving for a near-term purchase like computer gadgets or a vacation.

Since the Federal Deposit Insurance Corporation (FDIC) insures savings accounts up to $250,000, there is little chance of losing the money in the account.

Here is the catch with savings accounts: The interest rate is very low — sometimes below 1 percent.

Stocks

With stock investments, a higher level of risk is assumed, and a higher level of return is expected.

Stock investments can double or triple an investment over many years, but just like stock prices, the rate of return (or loss) fluctuates from day to day. As such, an effective handling of risk and knowledge about market conditions are necessary.

Stock investments can cause a considerable taxable income and incur a significant tax. In addition, money invested in stocks is less accessible than money kept in a bank account.

In general, savings accounts are a way to preserve wealth, while stock investments are a method to build wealth. Both are essential components of a diversified financial plan, particularly when planning for retirement.

Other Investment Options

There are other approaches to growing money, including bonds and certificates of deposit (CD). Both carry lower risk than stocks, and higher interest rates than savings accounts.

A bond is essentially money that is loaned to a company or a government for a set period of time. It pays a fixed interest rate to the investor.

A CD is a special type of account that pays interest. The investor commits a fixed sum of money for a fixed period of time. When the CD is cashed in at the end, the investor receives the original investment plus interest.

Investment books, financial talks, conventions, trade shows and investment advisers can help an individual make informed and sound financial investments and can assist consumers with debt consolidation.


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