Preferred Consumer | Financial | Investing


INVESTMENT OPTIONS

Preferred Consumer provides you a quick guide to some of the investment options available. Please remember to research all your possible investment choices carefully. Using the Preferred Consumer Financial Guide will make researching your investment opportunities easier.

Savings Accounts

Such accounts are a good place to store your emergency funds. They are generally insured by the FDIC up to $100,000 for all deposits at one institution and provide easy access to your money. The chief drawback is that interest rates tend to be low.

Money Market Deposit Accounts

These accounts usually earn slightly higher interest than a savings account but still allow easy access to your money. Some banks and financial institutions require an initial deposit of $1,000 or more and limit the number of withdrawals or transfers you can make during a given period of time.

CDs - Certificates of Deposit

CDs usually earn more interest than a savings account and are a very low risk financial vehicle. They are generally insured up to $100,000 by the FDIC for all deposits at one institution. You agree to keep your money on deposit for a fixed period of time. Usually, the longer the term, the higher the interest rate. There may be penalties for early withdrawal.

Stocks

When you buy stocks, you acquire shares of a company's assets. If the company does well, you may receive periodic dividends and or be able to sell your stock at a profit. If the company does poorly, the stock price may fall, and you could lose some or all of the money you invested.

Bonds

When you purchase a bond, you are essentially loaning money to a corporation, the U.S. government or a local government for a certain period of time, called a term. The bond certificate promises that the issuing entity will repay you on a specified date with a fixed rate of interest. Bond terms can range from a few months to 30 years.

Bonds are generally considered a safer investment than stocks, because bondholders are paid before stockholders if a company becomes insolvent. Independent bond rating agencies such as Standard & Poor's and Moody's rate the likelihood that any given bond will default. You can find bond ratings in each agency's publications at your local library.

Although there are no penalties for selling a bond before the end of its term, the value of the bond is subject to interest rate fluctuations. If interest rates have risen since you bought your bond, you may have to sell it at less than face value. It is also possible that the bond's yield will turn out to be less than the rate of inflation.

Some of the bonds available:

  • Savings bonds, Treasury bills (commonly called T-bills) and other securities issued by the U.S. government.
  • Zero coupon bonds, which are similar to savings bonds. No periodic payments of interest are made. The bonds are bought at a discount and are worth their face value upon maturity.
  • Municipal bonds (munis), which are sold by states, cities and other local governments. They are often tax exempt, which means you will pay no taxes on the interest earned.
  • Insured bonds, which are less risky but generally pay lower interest rates because of the protection.
  • Convertible bonds, which can be converted into stock.
  • High-yield bonds, commonly referred to as junk bonds, which are issued by corporations or governments with low ratings. They are very risky.

Mutual Funds

A mutual fund is generally a professionally managed pool of money from a group of investors. A mutual fund manager invests your funds in securities, including stocks and bonds, money market instruments or some combination and decides the best time to buy and sell. By pooling your resources with other investors in a mutual fund, you can diversify even a small investment over a wide spectrum, which should reduce risk.

There are many types of mutual funds with varying degrees of risk. Most mutual funds charge fees, and you often pay income tax on your profits. Tax rules can be complicated, requiring professional advice.

Annuities

Annuities may be deferred or immediate. Both are financial contracts you make with an insurance company. However, a deferred annuity helps you accumulate money for retirement, while an immediate annuity provides you with a steady stream of retirement income in return for your money.

With a deferred annuity, you put money in, and over time it accrues income and interest. The payout occurs at some later date, when you receive a steady stream of payments to supplement your other income. The contributions you make to a non-qualified annuity are not tax-deductible. Contributions to a qualified annuity that is funding an IRA, 401(k), 403(b) or other qualified plan may be before tax or tax deductible. However, taxes on the earnings in an annuity are deferred until you begin receiving payments. Because annuities are generally administered by insurance companies, they can be set up to include life insurance benefits, such as a death benefit to a surviving spouse.

Immediate annuities are usually purchased with one lump sum payment and then begin an immediate payout. You receive payment on a monthly or other regular basis, giving you needed income. You can generally choose to have the payouts guaranteed by the issuer for as long as you live or choose from a number of other payment options.

Both deferred and immediate annuities can be either fixed or variable. The issuer of a fixed annuity guarantees a fixed rate of interest (deferred) or a fixed payment (immediate). Although you are protected from any downturn in the market, you won't benefit from any upswings. A variable annuity can earn a flexible rate (deferred) or pay a variable payment (immediate) depending on the performance of the underlying investment options you choose. Variable annuities are designed to accumulate money or provide an income stream that hopefully will rise over time to keep pace with inflation. However, there is some risk involved if the market does poorly during the time your money is invested.

Annuities can be a complicated investment, so discuss them with a qualified financial advisor to make sure you understand all the options and make the smartest decisions for your financial needs.

Your Home

Your home may be the largest investment you will make during your lifetime. The market value of your home is determined by such things as its condition, the neighborhood, school districts, square footage of the house and house style.