Your Questions About Advantages And Disadvantages Of Investing In A Savings Account

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Ken asks…

Math help….Investing?

I have a project in which I have to do the following:

You have $1000.00 to invest. Investigate the advantages and disadvantages of each type of investment.

(a)Checking account
(b)Money Market Account
(c)Passbook savings account
(d)Certificate of Deposit

I’m having trouble with this because, I was not given specific interest rates, don’t these vary…?

I’m confused.

financi4 answers:

These do vary. You are supposed to do the research with a local back to find out what the interest rates are and how they are calculated, as well as fees and holding requirements, etc, then make a judgment about how you would invest.

William asks…

Should i invest in a cd or Roth Ira?

I wanted to know how much do i need to start investing and the advantages and disadvantages of a cd or Roth Ira? And what do you think i should invest in? I currently have a savings account but i want to make more money…

financi4 answers:

Such a complex yet very good question.

I’ll go over the basics but (disclaimer alert) please do further research for yourself before committing to an investment plan.

First, the question of CD vs. Roth IRA. The investment goals for these two are diametrically opposed.

A CD is used for mostly short term investments. Similar to the Savings Account you currently have, money is put into a CD which after a predetermined period of time will earn a predetermined amount of interest. Unlike a Savings Account, in which you can withdraw funds as needed, early withdrawals from a CD will result in penalties. At the end of the year, interest earned by the CD and Savings Account is treated as ordinary income when calculating taxes. Looking at it very simply, the amount of interest that you earn is added to wages, the total of which you would look at a tax table to figure out your taxes.

A Roth IRA is used for long term investment with the goal being that the investment will grow until retirement and will not be withdrawn until after retirement. There is a limit on how much can contributed to a Roth IRA up to a maximum of $4000 per year (in 2008 the limit will increase to $5000, then go up $500 each year to allow for inflation). Since a Roth IRA is funded using after-tax funds, withdrawals of the base contributions made after retirement are tax free. Earnings on the contributions are generally tax free (certainly at a lower rate than savings accounts and CDs).

Roth IRAs can be invested in many ways, including stocks and mutual funds. As with all types of investments, there is a certain amount of risk. Invested wisely, however, earnings can exceed those from traditional Savings Accounts. Mutual funds are generally considered to be safer investments than stocks as fund managers invest in groups of stocks with certain goals in mind. As individual stocks decrease in performance, the fund manager will replace it with a better performing stock. Some investors choose to invest in aggressive (more risky) funds which can yield higher earnings early in their career. As they approach retirement, the move is made to more conservative funds which still will yield earnings, but at a lower rate (but are less likely to lose their value). Some funds are set up to automatically achieve the goal of moving from aggressive funds to conservatives based on investment goals. In such a fund, you would continue investing in the same fund and over time the fund manager would transition from aggressive to conservative investing.

How much you invest will depend on your current age, your expected retirement age, and how much you think you will need to live comfortably. Since there is a yearly limit for investing in a Roth IRA, you won’t be able to play catch-up later for smaller investments now. If you can afford it, invest in the following order: 1) A 401(K) plan with pre-tax dollars (allows you to invest while lowering your salary amount, resulting in you being taxed at a lower rate) 2) A post-tax retirement plan like a Roth 401(K) or Roth IRA. If your company offers company matching, put as much into the company retirement plan as they will match. Put the excess into the Roth plans. If you still can afford to invest, you can decide whether to contribute more into the 401(K) or a separate taxable investment plan such as stocks, bonds, or mutual funds.

There are calculators on the internet which can be used to determine how much you should invest to meet a future goal. One tool, available at http://finance.yahoo.com/calculator/retirement/ret-02 lets you enter a number of assumptions such as current salary, the percentage of your salary you expect to have at retirement, and the number of years you expect to spend in retirement. The tool will then calculate how much you would need to save each year to meet your goal. Keep in mind that the required savings amount could consist of funds that you contribute to retirement plans and IRAs as well as earnings on those amounts.

This should give you a decent start. There is a lot to investing, but it is never too late to get started. If you are able, it would be a good idea to schedule an appointment with an investment professional to discuss your long term goals.

Happy Investing!

Steven asks…

HELP MEEEE.. please!!!!!!!!!!!!!!!?

1. The Department of compiles the statistics on the nation’s output and income.
1. Commerce
2. Internal Revenue
3. Health and Human Services
4. Defense

2. One weakness of a sole proprietorship is that the
1. owner has no control
2. owner has too many partners
3. owner faces unlimited liability
4. business will eventually go bankrupt

3. One advantage of a corporation is
1. unlimited liability for its owners
2. a lifespan that is not linked to a specific owner
3. the ease of obtaining a charter
4. it cannot enter into any legal contracts

4. The main advantage that partnerships have over sole proprietorships is
1. the ability to specialize
2. unlimited liability
3. the ease of obtaining a charter
4. they are more likely to succeed

5. Which of the following is an economic right of all businesses in the United States?
1. voluntary exchange
2. involuntary exchange
3. government ownership of property
4. the ability to function as a monopoly

6. Which of the following is an economic responsibility of all businesses in the United States?
1. Conduct all business in an honest and ethical manner.
2. Draft a code of ethics and make all employees sign it.
3. Close on all government regulated holidays.
4. Spread negative information about the competition.

7. More money becomes available for economic growth when
1. people save
2. pension funds increase
3. interest rates are high
4. there is high unemployment

8. Saving makes economic growth possible because
1. it means people have extra money and are spending less of it
2. buyers and sellers are working together to make saving possible
3. financial institutions lend the savings of others to those who will invest them
4. saving is more important than investing

9. In order for people to use the savings of others, the economy must have a(n) system—a network of savers, investors, and financial institutions.
1. saving
2. investment
3. transfer
4. financial

10. The United States GDP, which is the market value of all final goods and services produced in the nation in a year, is calculated by
1. adding the expenditures of the four sectors of the economy
2. multiplying production by consumption
3. subtracting total imports from exports
4. It is impossible to compute the GDP because it is impossible to measure all production data.

11. GDP is not a proper measure of the total production of the United States economy because
1. it only includes final goods
2. it does not account for household labor or volunteer labor
3. it does not take illegal or black market production into consideration
4. all of the above

12. What is the difference between real and nominal GDP?
1. Real GDP is exact, while nominal GDP is estimated.
2. Real GDP is adjusted for inflation, while nominal GDP is not.
3. Real GDP is estimated, while nominal GDP is exact.
4. There is no difference.

Use the following information to determine the inflation rates.

A consumer price index is used to measure the average change in price over time and to determine the inflation rate.

CPI Year 1= 95

CPI Year 2= 108

CPI Year 3= 119

CPI Year 4= 140

13. What is the inflation rate from year 2 to year 3 rounded to the nearest percent?
1. 9%
2. 4%
3. 6%
4. 10%

14. What is the inflation rate from year 3 to year 4 rounded to the nearest percent?
1. 5%
2. 11%
3. 18%
4. 25%

15. Monopolies are typically created because
1. the industry has high barriers to entry that prevent many businesses from entering the industry
2. increasing competition discourages new businesses from entering the industry
3. there is a lack of business interest in an industry
4. the government promotes the establishment of monopolies

16. Monopolies face disadvantages that focus around
1. production
2. prices
3. inefficiency
4. cost

17. An oligopoly
1. is an industry dominated by a small number of firms
2. is established when perfect competition exists
3. only occurs when buyers and sellers are fully informed
4. requires a partnership

18. One distinct difference between monopolistic competition and perfect competition is
1. product differentiation
2. insignificant
3. monopolistic competition is a monopoly

financi4 answers:

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