Savings Accounts

• Benefits:
  • FDIC safety
  • Instant access
• Risks:
  • Low returns and erosion of value through inflation
  • Ideal for emergency funds and short-term savings goals such as future purchases
  • Insured up to $250,000 per owner through Federal Deposit Insurance Corporation (FDIC)
  • No or low minimum opening deposits or minimum balances – watch for monthly withdrawal limits 
  • Interest rates fluctuate and may not keep up with inflation

Certificates of Deposit (CDs)

• Benefits:
  • Guaranteed return with higher interest rates than savings accounts
• Risks:
  • Early withdrawal penalties and interest rate risk
  • Ideal if you know you won’t need money for the period of the CD
  • Interest rates are typically higher and locked in for the term, even if other rates increase or decrease
  • Penalties if you withdraw early
  • When CDs mature, you may only find lower rates to reinvest

Money Market Accounts

• Benefits:
  • Higher interest rates than regular savings
  • May have checking features
• Risks:
  • Balance requirements, variable interest rates, and limited transactions
  • Excellent choice for emergency funds – higher interest rates and easier access
  • Interest rates are variable and may depend on account balance
  • Beware of fees that may reduce your yield

Series I Savings Bonds

• Benefits:
  • Inflation-adjusted interest rates
  • Tax advantages
• Risks:
  • Limited liquidity and purchase limits
  • Adjusts interest rate for inflation twice a year
  • Safe investment – carries the full faith and credit of the federal government
  • Interest may be deferred until redeemed or for 30 years – interest is exempt from state and local income taxes
  • Minimum investment $25, but limited to $10,000 per taxpayer
  • Must be held 12 months before redemption – 3-month interest penalty if cashed within 5 years

Stocks

• Benefits:
  • High growth potential
  • Liquidity
• Risks:
  • Market volatility and emotional investing
  • Stock is a partial ownership of a corporation, making you a part owner of the business
  • Stock values are volatile in the short term, but tend to show growth over long periods
  • Can be easily bought and sold online or through a broker
  • Dividends can be used for income or reinvested for compound growth
  • There is no guarantee of success – internal and external factors affect stock values

Bonds

• Benefits:
  • Steady income
  • Lower volatility than stocks
• Risks:
  • Interest rate and credit risks
  • Bonds are debt instruments – you are lending money to the company or government
  • Income comes from regular interest payments, and the principal is repaid at the bond’s maturity
  • Typically, more stable than stocks – can provide a portfolio buffer against of stock declines
  • Can be bought and sold on the secondary market – prices are affected by interest rates
  • Credit risk – the issuer may default on dividend or principal payments

Mutual Funds

• Benefits:
  • Instant diversification
  • Professional management
• Risks:
  • Market exposure and management fees
  • Mutual funds provide diversification – funds buy a broad variety of stocks, bonds, and other securities
  • Values fluctuate with market conditions – annual swings of 20% are common – but long-term growth averages 10%
  • Fund managers making trade decisions, for which you pay a fee
  • Funds offer long-term wealth building–time in the market beats timing the market

While risks exist, recognizing them and how to mitigate them can help you be a more successful saver and investor. Matching each tool’s strengths to your timeline and goals will help you build a mission-ready financial plan.

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While volatile in the short term, investing is the best way to grow wealth over time. Over the past 50 years, the stock market (S&P 500) has averaged an annual growth of over 11.7%, outpacing the average inflation rate of 3.1%.

Compound interest or growth has been called the 8^th wonder of the world. At 11.7% growth, $100 invested today will be worth $8,358 in 40 years.

For military members and their families, participating in the Thrift Savings Plan (TSP) can help build your retirement nest egg. TSP is the federal government’s equivalent to a corporate 401k plan, boasts low expenses to help your investments grow faster, and offers multiple investment options to meet your needs and risk tolerance.

Investing can seem scary and confusing, but an educated investor is a more successful investor.

I recommend these resources as a launching point for you to learn more about investing:

• Morningstar’s online Investing Classroom – This free resource is by Morningstar, the company that rates mutual funds. Choose from about 60 courses on stocks, funds, bonds, and portfolio building and monitoring. The courses cover everything you need to know, from the basics to advanced techniques and are about 10 minutes each, so you can learn in your spare time.
• Financial Industry Regulatory Authority – FINRA, the Financial Industry Regulatory Authority, offers free Smart Investing Courses to guide you into the world of investing. You can learn about investing basics, investment accounts, investment products, working with an investment professional and more.
• U.S. Securities and Exchange Commission – You can find their free Introduction to Investing page, which includes an explanation of various investment types, how to set savings and investment goals, how markets work, and how to avoid investment fraud. There is also a section dedicated to investing for retirement covering employer-sponsored plans, Federal government plans, and self-directed plans. There is a section to help you understand the implications that come with job changes such as lump sum distributions and rollovers. They also provide resources to help retirees and seniors manage their savings, investments, and Social Security.

If you haven’t already, start investing now, but make sure you are educated in what you are doing, or find a trusted professional to help guide you along this journey. It can be truly amazing to see your money grow over time!

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Common Fears

1. Fear of Losing Money: The possibility of losing hard-earned money can be daunting. And real. In the 96 years since 1928, the S&P 500 has been down 32 years. Seven of those years saw losses of 20% or more. That means the market was up in 64 years!

2. Lack of Knowledge: Many people feel they don’t know enough about investing to make informed decisions. The world of investing can be confusing. The world of investing has a language all its own; stocks, bonds, options, puts, calls, bears, bulls, mutual funds, ETFs, among others, making investing principles seem beyond the average person.

3. Market Volatility: The ups and downs of the market can be intimidating. The market has its ups and downs with swings of 10% or more in 70 of the 96 years between 1928 and 2023.

4. Past Negative Experiences: Previous losses or bad experiences can deter future investments. “Once burned, twice cautious” is a reality for many.

5. Complexity: The perceived complexity of investment options can be overwhelming.

6. Fear of Making Wrong Choices: The fear of picking the wrong stocks or funds can paralyze decision-making. Starting with an index fund that tracks the broad market or a target date fund can help you get started. You can add funds or other investments later as you learn and become more confident.

Ways to Alleviate These Fears

1 – Educate Yourself: Knowledge is power. Learning about different investment options and strategies can build confidence. Many free resources can help anyone understand investing and investments. One excellent tool is the Morningstar Investing Classroom with more than 60 courses on stocks, funds, bonds, and portfolio management.

2 – Start Small: Begin with a small amount of money to get comfortable with the process. For retirement investing, start with at least an amount to get your employer’s 401k/503b, or TSP match. Work your way up to 15% of your gross income. For non-retirement investing, consider your goal and timeframe and invest amounts that won’t wreck your everyday finances should the investment not be successful, especially at the beginning.

3. Diversify: Spread your investments across different assets to reduce risk. Mutual funds and Exchange Traded Funds (ETFs) can help you easily diversify.

4. Set Clear Goals: Specific financial goals can provide direction and motivation. Know why you’re investing, your timeframe, and what the plan for the money is for.

5. Know Your Risk Tolerance: Every investment carries an element of risk. Knowing the risks and rewards of different investments, you can select the right investment for your goals and risk tolerance.

6. Seek Professional Advice: Financial advisors can offer personalized guidance and reassurance. A good professional can help you learn about investments and investing, guide you to the right investments, and help you logically manage the ups and downs of the market.

7. Focus on the Long Term: Investing, especially retirement investing is a long-term game. Short-term fluctuations are normal, but the saying, “Time in the market beats timing the market” is true.

By addressing these fears with education, strategy, and support, you can build a more confident and successful investment approach. The U.S. Securities and Exchange Commission has additional resources, along with its sister website Inverstor.gov.

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Stocks, also known as equities, are securities that represent fractional ownership in a corporation. Share owners actually own a piece of the corporation that issued the stock, and are entitled to a proportional share of the assets and profits of the corporation. The value of a stock is affected by a number of variables, but is tied to the value and future profitability of the company, and can be rather volatile.

Bonds, on the other hand, are debt instruments. Businesses, localities, states, and nations use bonds to raise money by borrowing from investors. Think of it as an I.O.U. between the issuer and lender.  Bonds typically pay a fixed rate of interest (although some pay a variable rate), called dividends. These dividends are paid until the bond’s maturity date, at which time the amount of the “loan” is repaid. While bonds pay a fixed rate while held, the current value of a bond can change based on general interest rates, the amount of time until the bond’s maturity, and the potential of the borrower to default on the loan.

Find Out More with MyMilitarySavings.com and Finances!