Office of Financial Aid & Scholarships

Financial Planning

Saving and Investing

There are numerous saving and investing options:

  • Savings Account: A savings account is a deposit account in a bank or credit union that pays interest on your balance -- typically at a lower rate than you earn on other bank products.

  • Checking Account: Checking accounts are transaction accounts that allow you to authorize the transfer of money to another person or organization either by writing a check that includes the words "Pay to the order of" or by making an electronic transfer.

  • Money Market Account: Money market accounts are bank deposit accounts that permit a limited number of cash transactions per month and typically pay interest at rates comparable to or slightly below the rate on short-term certificates of deposit (CD) from the same institution. As bank products, money market accounts have the safety of Federal Deposit Insurance Corporation (FDIC) protection, currently up to $250,000 per depositor per account type.

  • Certificate of Deposit (CD): Certificates of deposit (CDs) are time deposits with fixed terms, typically ranging from three months to five years. On traditional bank CDs, you earn compound interest at a fixed rate, which is determined by the current interest rate and the CD's term. You usually face a penalty if you withdraw funds before your CD matures.

  • Bond: Bonds are debt securities issued by corporations and governments. Bonds are, in fact, loans that you and other investors make to the issuers in return for the promise of being paid interest, usually but not always at a fixed rate, over the loan term. The issuer also promises to repay the loan principal at maturity, on time and in full. 

  • Mutual Fund: A mutual fund is a professionally managed investment product that sells shares to investors and pools the capital it raises to purchase investments. A fund typically buys a diversified portfolio of stock, bonds, or money market securities, or a combination of stock and bonds, depending on the investment objectives of the fund. Mutual funds may also hold other investments, such as derivatives and cash.

  • Stock: Stock is an equity investment that represents part ownership in a corporation and may entitle you to voting rights, part of the corporation's earnings, or standing as a creditor in the case of bankruptcy.

  • 401(k): You participate in a 401(k) retirement savings plan by deferring part of your salary into an account set up in your name. Any earnings in the account are federal income tax deferred. If you change jobs, 401(k) plans are portable, which means that you can move your accumulated assets to a new employer's plan, if the plan allows transfers, or to a rollover IRA. With a traditional 401(k), you defer pretax income, which reduces the income tax you owe in the year you make the contribution. You pay tax on all withdrawals at your regular rate, determined by your filing status and tax bracket. With the newer Roth 401(k), which is offered by some but not all employers who offer traditional 401(k)s, you contribute after-tax income. Earnings accumulate tax deferred, but your withdrawals are completely tax free if your account has been open at least five years and you're at least 59 1/2.

  • Individual Retirement Account (IRA): Individual retirement accounts are one of two types of individual retirement arrangements (IRAs) that provide tax advantages as you save for retirement. Everyone with earned income may contribute to a tax-deferred IRA. Those whose modified adjusted gross income is less than the annual cap for his or her filing status qualifies to contribute to a Roth IRA. Earnings in a Roth IRA are income tax free at withdrawal if you are at least 59 1/2 and your account has been open at least five years. Contributions to a Roth IRA are never deductible.

  • Pension: A pension is an employer plan that's designed to provide retirement income to employees who have vested -- or worked enough years to qualify for the income. Defined benefit plans promise a fixed income, usually paid for the employee's lifetime or the combined lifetimes of the employee and his or her spouse. The employer contributes to the plan, invests the assets, and pays out the benefit, which is typically based on a formula that includes final salary and years on the job. 

CashCourse. (2018). Financial Glossary [Website]. Retrieved from https://www.cashcourse.org/Student/Financial-Tools/Financial-Glossary

Compound Interest

Compound interest is calculated on the principal (initial investment) and then on accumulated interest, essentially interest on interest. The Compound Interest Calculator from NerdWallet is a useful tool to help you understand the value of compound interest.

Risk

Investing involves different levels of risk tolerance. There are different types of investments for varying levels of risk. For example, if people were very conservative and prefer as little risk as possible, they may save their money in a bank or credit union. If people were willing to be aggressive and tolerate risk, they may invest in individual stocks. The key to investing is knowing your risk tolerance, diversifying your investments (i.e., not having all your money in one specific investment), and allowing your money to collect compound interest over a long period of time.  

Tips

  • Get in the habit of saving

  • Invest early

  • Create an emergency fund

  • Diversify your investments

  • Take advantage of employer matching retirement plans


Resources

  • Nerdwallet provides free information, financial tools, and objective advice about credit cards, investing, mortgages, loans, and insurance.

  • myFICO Calculators includes a variety of financial calculators to help you better understand credit cards, mortgages, auto financing, college planning, and budgeting.