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When determining the best plan for your money, the first thing to consider is the risk involved. Are you willing to make the gamble to earn the big bucks, or do you want to go the safe route with pittance for returns? It's your decision, but we're here to help make that choice a little easier; we're going to break these investments down into 3 broad categories: High Risk, Medium Risk, and Low Risk investments.
LOW RISK INVESTMENTS
- Certificate of Deposit (CD) : A CD is a time deposit in the same vein as a savings account, and as such they are insured and virtually risk-free. They are insured by federal institutions such as the FDIC and the NCUA. The big difference between a general savings account and a CD, however, is that a CD usually sits with a fixed interest rate and a fixed maturity time at which you can pull it for the full value plus interest, and include penalties for early withdrawal of money. They also often require a rather substantial initial investment.
- Money Market Mutual Fund : A basic investment fund where a public pool of investors all work together to try and create a large and safe portfolio of shares. Such a fund is almost devoid of risk, but also doesn't rake in big bucks any time fast.
- Government Savings Bonds : Issued by the U.S. Treasury, these bonds are some of the safest out there because defaulting is secured directly by the federal government itself. That said, don't expect to become a millionaire overnight relying solely on these.
- Treasury Notes and Bonds : Similar to Government Savings Bonds, these are a safe option for new investors. These debt securities are issued by the federal government, and are set with a fixed interest rate and maturity period. Low risk, medium reward.
MEDIUM RISK INVESTMENTS
- 401(k) : A 401(k) is a retirement savings fund which is filled by the employer by taking a percentage of your income, tax-free, and putting it into the savings, often matching your investment proportionally. This would otherwise be a fairly low-risk investment, however a 401(k) is not government insured and may run into complications when transferring between jobs. That said, bankruptcy laws but precedence on such plans, so you're likely to see a decent return for your investment with only minimal risk.
- Bonds : A bond is a security in which a company borrows money with a promise of repayment with interest. These bonds are traded much like stocks and purchased most often by big businesses and mutual funds. Due to the nature of this promised repayment, bonds can be considered safer than stocks, but only to a certain extent. They are not as volatile, but may still suffer from inherent risks due to inflation, credit, reinvestment, etc... that could tank the price and ultimately damage a fund's trading portfolio.
- Municipal Bonds : A type of bond issued by a municipality (the local government), or their agencies. These types of bonds are particularly good as an investment because they are immediately free for trading once purchased by an investor, and are often exempted from federal and state taxes due to their nature. As a bonus, being a bond issued by a government entity, the rate of default is fairly low. So, low risk, fairly high chance of reward.
- Treasury Bill : Issued by the U.S. government, these bills are lower in risk, but are much more competitive and much less immediate an option than others. T-Bills are bid over, bought, and then only pay out the interest on the investment after the maturity period has ended. Basically, you get a time delayed "IOU" from the fed...
HIGH RISK INVESTMENTS
- Corporate Bonds : Corporate bonds are a type of bond made with a corporation wants to take out a loan of money for certain expenses, such as business expansion costs. These kinds of bonds are often much higher risk than a government bond because of the volatile nature of a corporation as a private entity, and the therefore inherently higher risk of default. Generally this also comes with a similarly higher potential payout.
- Junk Bonds : These bonds are high risk, high reward. These bonds are issued by companies with a not-spectacular credit history, and are much more likely to default, but if successful are much more likely to see big payouts.
- Equities : Some of the riskiest assets on the market, these are the public stocks you might be more traditionally familiar with. NASDAQ could make you millions or make you penniless... But you don't make the big-time by playing it safe.