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Everyone puts money in a bank. The first time as a child that you received money, whether it was from a gift at your birthday party, or money you earned from raking the lawn or taking the trash out, your parents had you put money in the bank. Your parent’s put their money in the bank, and their parents did as well. After all, it’s a safe place to store it. But is a bank the a good way to grow your money? This article will detail how banks work, what CDs and MMAs are, and these options are not good long term savings solutions.

With a typical banks’ savings account, you lend the bank money in the form of your deposits and they pay you a guaranteed interest rate (generally less than 1%) and provide you safety in the form of FDIC insurance. Banks then lend that same money that you loaned them over and over again for a profit.

This system is known as Fractional Reserve Banking, which requires the commercial banks to keep only portion of the money deposited with them as reserves. The bank pays you a guaranteed interest rate on all your deposits, pools the money loaned by its other customers, and makes new loans.

Here’s an example of how it works:

Somebody deposits $1,000 with Bank A. Bank A is obligated by law to keep 10% of the deposited money as a reserve, so the bank keeps $100 and lends out $900. Later, the $900 loan is deposited in another checking account. This second bank also wants to make money by giving out loans, that’s why it keeps the required $90 and lends $810.

Fast forward to a deposit with a fourth bank and you’ll get the following:

Bank – Deposit – Reserve – Loan
Bank #1 – $1,000 – $100 – $900
Bank #2 – $900 – $90 – $810
Bank #3 – $810 – $81 – $729
Bank #4 – $729 – $729 – $0
Total – $3,439 – $1,000 – $2,439

As you can see from the table above, the banks created $2,439 based on the first $1,000 deposited. How much money did you receive as guaranteed interest for your $1000? $5 per year! Banks pool your savings to make large profits and pay your savings accounts less than the inflation rate as interest. Hardly seems fair to me.

In addition to your typical savings and checking accounts, banks also offer other opportunities to pay you for your funds, such as Certificate of Deposits and Money market accounts.

Certificate of Deposits

Simply put, a CD is a short term to midterm investment offered by commercial lending institutions that offers FDIC Insurance and a guaranteed interest rate. The consumer lends the bank money for a fixed term and in exchange is paid a predetermined interest rate.

The advantages of a CD are as follows:

* Guaranteed interest rate as long as you keep the money in the CD for the entire term
* FDIC Insurance to insure your money

The 2 main problems with CDs are the penalties for early withdrawal and the low interest rates. The fees for early withdrawal can be substantial and you will want to make sure that you know what the penalties are before entering into any agreement with the bank.

Also, the interest rates are generally low for CDs as well. As of the summer of 2010, 2 year CD rates were under 2% interest. Traditionally inflation is around 3%, so keeping money in a CD can be counterproductive.

While you earn a guaranteed interest rate and have protection in the form of FDIC Insurance, is this really the best way to grow your money? Let’s take a look at 2 different people and see which one can save the most.

Person 1 has $20,000 to invest and decides to put it into a CD for 2 years that guarantees an interest rate of 2%. Person 2 has $20,000, puts it in a shoe box and buries it in the back yard. He is also a coffee addict and gets of Venti cup of Coffee at Starbucks every day for $2.00. Person 2 decides to stop purchasing a cup of coffee and put that money in an envelope and keep the savings under the mattress. Who will save more money?

Person 1 invests $20,000 for 2 years in a CD offering a guaranteed 2% interest, and when the CD matures, his money will now be worth $20,815.52, or will have earned $815.52.

Person 2 stops spending $2/day for (100 weeks * 5 days a week * $2)= $1000.00.

Person 2 no longer purchasing a simple cup of coffee will save more than Person 1 investing in a higher end CD! In fact, it will take Person 1 36 years to double their investment with a 2% interest rate! If not buying a cup of coffee and keeping the money under your mattress beats your savings plan, it is time to look for something better.

Money Market Accounts

Simply put, an MMA is a premium, high interest savings or checking account. These MMAs can be started at any commercial lending institution. The money you keep in this account will be invested, by the bank and collects the return. You are guaranteed an interest rate during this process.

The advantages of a Money Market Account are as follows:

* Interest is compounded daily and paid monthly
* Can usually write anywhere from 3-6 checks per year without penalty
* Heavily regulated by SEC which forces lending institutions to make safe investments
* FDIC Insurance to insure your money if the bank goes under

Interest rates vary from bank to bank so it’s a good idea to do some research prior to investing. Generally, the higher the interest rate, the higher the minimum balance.

Some of the disadvantages of the MMA are the minimum balance fees, the varying interest rates, and tax consequences on your interest earning. Also, the interest rates are not that high. As of the summer of 2010, the highest MMA interest rate I could find is only 2%.

Summary

In conclusion, a typical bank will pool their lender’s money together, make profitable investments, keep the collateral, and then pay you an interest rate just under the inflation rate, and charge you fees in an attempt to get back the money paid to you in the form of interest. Banks offer safety in the form of FDIC Insurance, which basically gives the banks carte blanch to make as many risky investments as possible since the government will pick up the tab if anything goes wrong. Isn’t it amazing that with the combination of fractional reserve banking and the FDIC backing all deposits that the banks still require a bailout? Bank accounts are good for keeping money on a short term basis for paying bills. Investing your money in a vehicle where you can earn a guaranteed interest rate is the only way to safely grow your money.

Many people today are turning to low risk investments due to stock market taking such a roller coaster ride as of late. There are many options available who are not big risk takers.

Most of the lower risk options you can find right through your local bank, probably the bank that you are doing business with right now as a matter of fact.

Savings Accounts

As far as low risk investments, savings accounts should really be called no risk investment options. There is very little risk that anything will happen to your principal interest in these types of accounts, however be sure not to put all your eggs in one basket, only keep the limits of the FDIC in any one institution just to be extra safe.

Money Market Accounts

Money market accounts (MMA) are super safe. They usually require that you maintain a certain balance and they are much like savings accounts. They are very liquid which is great for the shaky investor. There are some limitations on these types of accounts, like the number of transactions and the number of withdrawals. This is an investment vehicle so it is not meant for you to be moving money in and out a lot.

There are different types of MMA’s some offer check writing ability while others do not. Usually they are set up by banks and other financial institutions.

Certificates of Deposit

Super safe option is a certificate of deposit (CD) not quite as liquid as a money market account, because typically the money has to be held in the account for a specific length of time. The time constraints vary from six months to five years, and there is usually a stiff penalty for taking the cash out before the time has elapsed.

There is an exception to the tax rules when converting. If an individual made nondeductible contributions to their traditional IRA, this amount will not be taxed. If the person has made significant contributions that are nondeductible, converting to a Roth IRA will have enormous benefits. An easy deciding factor is whether an individual has the money available to pay the taxes that will be due. If they do, then the conversion is probably beneficial. If not, the individual may want to reconsider the conversion.

After making sure eligibility requirements are met, many people will still ask why they should convert to a Roth IRA. IRA retirement income is a huge asset as workers near the age of retirement. These accounts, regardless of the type, will provide an extra source of income.

Comparing to IRA Account

To understand why a Roth IRA can be more beneficial, individuals should be able to answer the common question of “what is it?” It is an individual retirement account that has benefits over other IRA accounts. The overall structure of a it is similar to other IRAs. The main difference is that contributions are made after taxes. This means that taxes have already been paid on the amount being contributed.

The positive side to this is that when withdrawals are made after the age of 59 1/2, there will be no taxes included, making a this account a form of tax-free income. Another key benefit is that there are no mandatory required withdrawals. When comparing a Roth vs. traditional IRA, these are the main differences. Roth IRA accounts also allow individuals to keep contributing after they retire. The contribution limits are the same as a traditional IRA. These three main points are what makes a Roth more attractive for many people. In most situations, a Roth IRA will provide the most benefits and will be a definite source of income after retirement.

IRA & Retirement Plan Investing

IRA and retirement plan investing is one of the most important decisions anyone can make. This decision will provide the basis of your retirement savings. There are many ways to save for the years to come, but IRA accounts are the safest and easiest way to assure there will be an income source upon retiring. If possible, it may be best to begin with a Roth IRA so there will be no need to convert later. However, a conversion to Roth is not the only option. In some cases, people opt to convert their current Roth IRA to a traditional IRA. This can occur when an individual receives a significant pay increase. If they no longer meet the Roth IRA limits regarding income, they will not be able to contribute to the account any longer. In this situation, converting to a traditional IRA will allow contributions to resume.

Recently, many people are concerned about the financial safety of their IRA accounts. It should be noted that IRAs are considered a source of income. This being said, these accounts may be included in lawsuits and bankruptcy claims. There is some question whether Roth IRA accounts are protected in the same way as traditional accounts. If the account has a large amount of money, it may be deemed an asset and subject to legal findings. If there is any concern over the safety and protection of a Roth IRA, consult with a tax professional. Call us toll-free at (888-938-5872) for a free, initial and private consultation regarding protecting your Roth IRA accounts and any assets you hold.

IRA Insurance Protection

Currently, ERISA, SPIC, and FDIC offer different levels of IRA insurance depending on where the funds sit for general liability if a financial institution goes belly up, but not for market-related volatility. Generally, this insurance will only cover the amount of the account in CD’s and Money Market accounts. This insurance is applicable to traditional IRAs. It has not yet been determined if Roth IRA accounts will fall under this insurance coverage. With regards to creditors, many states offer some level of creditor protection to regular IRAs and 401(k)’s – although not completely protected. The bankruptcy laws from state to state vary and need to be considered. If you are in a high risk profession, these should be a consideration when establishing your IRAs.

Converting an IRA account is a serious decision. It is important to review all IRA rules, including the simple IRA rules as well as IRA withdrawal rules. Take the time needed to compare the pros and cons of each type of account. An IRA account is the main source of income for many retired individuals. A conversion may be a good choice for many who wish to receive tax-free income after they retire.

Assumptions on the Roth IRA Conversion

This article is based on several assumptions including the length of keeping your money in the Roth IRA. If you do not plan on keeping your money in the account long enough to offset the challenges with the conversion, the assumptions may be inaccurate for your situation. You should always consult a tax expert. Please call us today and we’ll help you through these tough decisions and assess your best avenue for success.

Everyone has that bill that comes up once a year, but always seems to sneak up on you, or that family emergency that leaves you penniless and wondering how you will ever get ahead, maybe for you the one big financial struggle is paying for Christmas every year. Whatever the case, there are big-ticket items that cause us all to struggle financially.

Most of these purchases or payments are things that we could plan for if we would just do it. We all know that the house insurance is due every year, that there will be emergencies that we cannot avoid and that Christmas comes around once a year. The problem is that we do not plan for these events and therefore struggle with having the money to pay for them.

One of the best ways to plan for these items is to create sinking or lump sum funds for them, by setting aside money every month. You can do so by deciding how much money you want or need to put aside for each item. For example, how much do you usually spend on Christmas? Decide on the amount and then divide that amount by 12 if you are going to begin doing this throughout the year or if you are getting a late start, divide it by the number of months you have until Christmas or whichever month the item you are planning for is due.

You will put this money into a special account, such as a separate savings, checking or money market account. Putting the money in any of the three type accounts will allow you to keep track of the money separately and to gain access to it when you need it. Therefore, you will need to make sure that the type of account you choose to use will allow you to quickly and easily gain access to the money without paying any penalties for doing so.

You can use one account for all of your sinking funds just make notes in a notebook or on your computer in a spreadsheet of how much money you have put in for each item. Then, when the time comes to pay your house insurance the money will be waiting in the account, and when Christmas comes around, you will have money for that as well. No more feeling guilty because you haven’t saved, or struggling to scratch up enough money to keep your house insurance, or to get yourself out of that emergency.

What is Variable Life Insurance?

A variable life policy is a permanent policy, so it is similar to whole life. It has an insurance account and a savings or investment account. Traditional whole life policies may also have a cash value, and this cash value can grow because of interest or dividends. But a policy owner has little control over the cash value of a whole life policy. It will grow by some present interest rate or market index, but that cash is managed by the insurer that issues the policy.

In contrast, a variable life policy has investment accounts with a selection of funds that the policy owner can select and change. So the owner has some control over how that cash is managed. These may be equity, mutual, or money market funds.

Variable Life Means Control and Risk

So the policy owner has more control. But they also take on more risk. In good years, when the funds rise, the value of the money accounts may grow. This may increase the value of the cash portion, and it may even be used to pay the policy premiums.

In down years, the reverse may be true. If the cash value declines, the premiums can get more expensive too. There has to be money to pay the premiums in order to keep the life insurance in force.

In general, there may be a threshold that is guaranteed to help manage this risk. There could be a minimum death benefit that is pre-defined in the policy. There could also be a minimum that is guaranteed by the insurer for the value of the cash accounts. It is important to fully understand your policy before you buy it!

Pros and Cons of Variable Life Insurance Policies

The owner has more control over the performance of the cash account. They can choose between funds and change the allocation at will. If the cash account does grow, the owner should not be taxed on the gain unless they sell the policy. A lot of life insurance proceeds or gains are not taxed. Beneficiaries can usually collect the death benefit without being taxed on it. There is risk! The funds could decline in value. This means the cash account could decline, and it also means the premiums could get more expensive! Note that some policies have guaranteed thresholds to minimize this risk. How To Learn More About Variable Life Insurance Policies

These policies can be a bit more complicated than the traditional types of life policies you are used to. This is because they combine some elements of insurance and investments. You have some potential for gain and tax advantages, but there is also some risk.

Since policies that are on the market, and of course, insurance rates, will be different in different local areas, you need to find a qualified local variable insurance broker to help you understand your choices. You can find some online life insurance quote forms to help you compare insurers. These forms will also give you the contact information for local brokers who are eager to help you find the best solution.

Money is believed to increase in value that compounds or grows over time. If invested wisely money can work in your favor and grow substantially.

One way to see your money grow or compound is through a money market account. These accounts operate as a type of savings account that you can find through banks and credit unions. They differ from savings accounts since they can retain higher interest, have higher minimum requirements, and only allow three to six withdrawals per month. They operate by the accumulation of interest the growth of your money is dependent on the interest paid by banks and how they loan out the money so it can grow in various markets. Your money then acclimates compounded interest where the bank pays you money on what they invested into various loans.

The interest acclimated on money market accounts usually grows daily and is seen in your monthly statements. Money market accounts can only flourish with consistent deposits, so the more you invest in your account the faster your money will compound and grow.

You can also be assured that your account is protected since money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC). This is a peace of mind to investors since your money will not be affected even if the bank or credit union goes out of business. The rates of interest on money market accounts vary from bank to bank so investors should research various accounts taking into consideration fees, balance requirements, and interest rates.