Light at the End of the Debt Free Tunnel

One reader sent in this question and was so excited about having paid off all credit card debt and now ready to start saving! The question was asking what kinds of accounts to establish. Again, knowledge is power and the more you know, the more you can maximize your dollars!

Q. I have finally paid off my credit card debt and am now in a position where I can start saving money on a monthly basis. I’d like to have access to this money and want it to be as secure as possible. Can you let me know some options on where to invest my money?

A. Congratulations on paying off your credit card debt! This clearly takes discipline, commitment and being conscious of your spending habits. Now, you are in your "savings" phase. Also referred to as an emergency fund, rainy day fund, reserve fund or a cash stash, it’s important to be clear on your financial goals so that you know what type of investment vehicles are most suitable at any given time. It’s important to determine what you want to save this money for and when you’ll need access to it as that will determine whether you need the account to be liquid and easily accessible or if you’ll be able to lock it in for a longer period of time.
In addition to a basic savings account and an interest bearing checking account, here are a few more options for you to consider when it comes to non-retirement investment vehicles:
MONEY MARKET ACCOUNT (MMA) - typically require a minimum of $2500 to open the account. They are generally glorified savings account that pay a higher interest rate than a regular savings account and are insured up to $100,000 by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Association. Generally, you are limited to the number of withdrawals you’re able to make against this account each month. Like most savings accounts, your money is liquid which means that it is instantly available and you can withdraw money any time you want without paying a penalty. Keep in mind that the interest earned is taxable.
CERTIFICATE OF DEPOSITS (CD’s) - will require that you deposit a fixed amount of money for a fixed term or period of time and you’ll be guaranteed your principal (the original amount invested) plus a fixed amount of interest. The required minimum to open a CD can be as little as $500 and there can be a penalty for early withdrawal. Terms can range from 6 months to 5 years and the longer the term, the higher your annual percentage yield (APY). When the term matures, you can opt to cash out or roll over (reinvest) the CD for another term. Going the CD route is more suitable when you know you won’t need your money right away as CD’s are not liquid. I have described what is known as a "traditional" CD but note that there are different types of CD’s. Like Money Market Accounts, CD’s are considered deposit accounts and therefore insured by the FDIC up to $100,000. Interest earned is also taxable.

There are of course, other investment vehicles and strategies available to you but these are good ones for you to get started with on your savings plan. As I said, it’s important to get clear on your savings goals so you can best determine when you will need to access your funds. Are you planning on taking that long dreamed of vacation? Are you planning on purchasing a new car? Of course, the first goal should be to save up enough money to cover your expenses for a minimum of 3 months in the event of an emergency and for this reason you’ll want to make sure the account is liquid. Beyond that, take the time to learn all you can so that you make educated decisions with regards to where you invest your money and always be sure to read the fine print! General rule is that the longer you can keep your money invested, the higher the rate of return you will earn. Keep up the great work!