Savings
Accounts |
• |
Definition:
Accounts at a bank, savings and loan, or credit union. |
• |
Risk:
Low risk because the Federal Government guarantees your money
up to $100,000. |
• |
Return:
The interest rate on most savings accounts tends to be relatively
low. |
• |
Liquidity:
High liquidity--you can withdraw your money at anytime. |
• |
Time
Frame: Good for shorter time periods--3 years or less.
|
|
|
Certificates
of Deposit (CDs) |
• |
Definition:
CDs are notes issued by banks that guarantee payment of a fixed
interest rate until a future date (the maturity date). |
• |
Risk:
Low risk because CDs of $100,000 or less are insured by the
Federal Govemment. |
• |
Return:
Interest rates are generally higher than the rates for savings
accounts but lower than the rates for longer term or riskier
investments. |
• |
Liquidity:
Relatively low--if you withdraw the money before the maturity
date, you pay a financial penalty. |
• |
Time
Frame: Good for medium time frames--anywhere from 6
months to 5 years. |
|
|
Money
Market Accounts/Money Market Mutual Funds |
• |
Definition:
Money market accounts are savings accounts offered by banks,
requiring a high minimum balance. Money market mutual funds
are available from brokers, many banks, and directly by mail.
The money that you deposit in these funds are invested in a
wide variety of savings instruments. |
• |
Risk:
Bank money market accounts have no risk on the first $100,000
because the government insures up to this amount. Money market
mutual funds are not guaranteed by the government, but the
bank or brokers usually invest the funds in very safe short-term
instruments that have the highest credit ratings. |
• |
Return:
The interest rate for bank money market accounts is generally
somewhat higher than for regular savings accounts. Rates on
money market mutual funds are often somewhat higher than for
bank money market accounts. |
• |
Liquidity:
High liquidity--you may withdraw your funds at any time. However,
money market mutual funds do not have to send you a check
for up to 3 days. |
• |
Time
Frame: Money market instruments are best for short-term
savings goals. However, because of their great safety and liquidity,
many people keep a portion of their total college savings in
these types of accounts. |
|
|
U.S.
Savings Bonds |
• |
Definition:
U.S. (EE) savings bonds are promises by the U.S. Treasury to
repay the owner with interest when the bond is redeemed. Bonds
earn interest for as long as 30 years. Bonds earn market-based
rates right from the start. They can be purchased from banks
and through employer payroll deduction plans in amounts 24 as
little as $50. |
• |
Risk:
Savings bonds are completely risk-free since they are Federal
Government obligations. |
• |
Return:
The interest rate on a savings bond is usually higher than
rates on savings accounts or money market mutual funds. However,
if the bonds are cashed in (redeemed) before 5 years they
may pay a lower rate of interest. |
• |
Liquidity:
Savings bonds are highly liquid and can be cashed in at any
bank in the U.S., not just the bank where you bought them. |
• |
Time
Frame: Good for medium and longer term savings. Although
they can be cashed in any time, the maximum interest is obtained
by holding them longer. |
|
|
Mutual
Funds |
• |
Definition:
These funds can be invested in U.S. Government securities or
in stocks and bonds. You can purchase a mutual fund through
an investment firm, brokerage house, many banks or directly
by mail. |
• |
Risk:
Risk varies widely depending on the objectives and policies
of the fund. Funds are not federally insured, but your money
is generally safer in a mutual fund than in a few individual
common stocks because a mutual fund invests in many different
stocks and bonds and thus spreads the risk over many different
investments. |
• |
Return:
The return on a mutual fund depends on whether the fund makes
good investments. |
• |
Liquidity:
Very liquid--you can sell the fund at any time. However, the
amount of money you can get for the fund depends on its value,
and the value changes regularly depending on conditions in
the stock and bond markets. |
• |
Time
Frame: Good for longer term investing--5 years or more.
|
|
|
Individual
Corporate Bonds or Stocks |
• |
Definition:
A bond is a promise by a corporation to repay the face value
of the bond, plus a fixed rate of interest, at a specific future
date. Stock represents part ownership of a company. You make
money on stocks either through the dividends you earn or by
selling the stock at a price that is higher than the price for
which you bought it. The prices of most stocks--and many bonds--are
listed in major daily newspapers. Over longer periods, the price
of the stock may increase or decrease. Stocks and bonds can
be purchased from brokerage houses and through some banks. |
• |
Risk:
The stocks and bonds of good companies can be quite safe over
longer time periods. However, these investments are not guaranteed
by the Federal Government or anyone else. Furthermore, there
are many companies that are very risky for a person to invest
in. An additional risk--even for good companies--is that prices
of their stocks will fluctuate widely and that an investor
will have to sell at a loss. This is risky for a parent who
may need to sell the stock to pay for college tuition at a
time when the price of the stock is relatively low. |
• |
Return:
Interest rates on bonds vary depending on the type of bond
and its rating. Generally, returns are higher than on savings
accounts, CDs and U.S. Savings Bonds. The return on individual
stocks can be very high depending on the dividends the company
pays and the increase in the price of the stock. However,
returns can also be low or negative if the price of the stock
falls between the time you bought the stock and the time you
sell it. |
• |
Liquidity:Most
types of corporate and all types of government bonds are highly
liquid. They can be sold through a broker on any weekday that
markets are open. However, some bonds can only be sold when
buyers make offers. Most individual stocks can be sold almost
any day; however, there an some exceptions. With both stocks
and bonds, you may have to wait for up to 3 days from the
date of sale for the broker to send you the proceeds. |
• |
Time
Frame: Short-term bonds are good for time periods of
1-3 years. All other bonds and common stocks should be considered
as longer term investments good for periods of 5-18 years. |
|
|
U.S.
Treasury Securities (Treasury Bills, Notes, or Bonds) |
• |
Definition:
The Treasury Department and Federal agencies issue different
types of fixed-income investments such a short-term bills (13-,
26-, 52-week bills), medium-term notes (2-10 years), and long-term
bonds (over 10 years). These securities can be purchased directly
from regional Federal Reserve banks, through regular banks,
and through brokers. Because there are relatively large minimum
purchase amounts some people prefer to invest instead in mutual
funds that invest only in U.S. Government securities. |
• |
Risk:
These securities have no risk since they are backed by the
Federal Government. |
• |
Return:
Interest rates on government securities vary with the maturity
of the issue. As with other fixed-income investments, short-term
issues generally have lower interest rates than longer term
issues. All government securities have interest rates that
are lower than corporate securities with the same maturity
because the government securities are considered safer. |
• |
Liquidity:
Government securities are highly liquid and can be sold through
brokers on any day the financial markets are open. |
• |
Time
Frame: Government securities have a wide variety of
maturities and can, therefore, be tailored to any time frame
needed by families saving for college. |
|
|
Credit: Preparing Your Child For College: 2000 Edition published
by The U.S. Department of Education |