Many adults lack the basic knowledge of personal finance, and this can have devastating effects on their lives.
Research shows that financial stress is among one of the leading causes of depression and anxiety, and it’s especially prevalent among millennials. A recent survey found that only 37% of Americans can correctly answer three simple questions about personal finance.
However, with just a little bit of education, you can proactively take steps to improve your financial future. Let’s look at two important tools for growing your savings — certificates of deposit (CDs) and Individual Retirement Accounts (IRAs).
What is a CD?
A certificate of deposit rewards you for storing your money for a specific period. During this time, it earns interest, which you can withdraw when your CD matures. This account has low liquidity, so you cannot withdraw your funds without a penalty until the maturity date.
Because of these characteristics, it’s often referred to as a “savings account with a time limit.” Because the interest rates on CDs are higher than that of a regular savings account.
The interest rate you earn on your CD varies depending on the term length and deposit amount.
An IRA is a long-term investment tool that allows you to save for retirement. You can contribute some amount up to $6,000 each year in an IRA and deduct it from your taxable income.
This lowers your monthly bills and allows you to save more for the future. You can choose from three types of IRAs — traditional, Roth, and SEP. The kind you choose depends on your current financial situation and future savings goals. – Traditional IRA – Traditional IRAs are tax-deferred accounts that let you deduct the amount you contribute from your current taxes.
This lowers your monthly bills, but you have to pay taxes when you withdraw the funds in retirement. – Roth IRA – Roth IRAs are taxable accounts, so you don’t get a tax deduction.
However, you don’t pay taxes on the amount you withdraw in retirement. This is a great option if you have a higher income and can’t benefit from a deduction. – SEP IRA – SEPs are employer-sponsored accounts that let you make contributions on a pre-tax basis.
How CDs and IRAs Help Your Financial Security
CDs and IRAs can help you achieve financial security in two main ways. They give you a good interest rate, which can help you reach your savings goal faster. And they help you diversify your investment portfolio, which is crucial for reducing your risk.
Better interest rates on CDs & IRAs mean that you can reach your savings goals faster. For example, say you’re saving up for a house. Instead of saving $1,000 in a regular savings account, you could put that money into a CD with a higher interest rate. This way, you can reach your savings goal more quickly.
How to Use CDs to Grow Your Wealth
When you use CDs to grow your wealth, you invest your money for long-term growth. There are many different CDs, each with its interest rate and features. Before choosing a CD, you should consider:
A CD ladder is a great way to use CDs to grow your wealth. It takes advantage of the fact that interest rates fluctuate over time. When CD rates are high, you can lock them into longer terms.
And when CD rates are low, you can opt for shorter terms. This way, you’re always benefiting from the highest possible interest rate. CD ladders are especially useful if you’re saving for retirement as they allow you to take full advantage of the interest tax-free.
How to Use IRAs to Grow Your Wealth
When you use IRAs to grow your wealth, you’re investing in stocks, bonds, and other high-risk assets. This way, you maximize your earnings, but it also comes with higher risk. Once you reach retirement age, you can withdraw funds from your IRA without paying taxes. This is perfect if you want to start living off your savings sooner.
However, if you withdraw funds before retirement, you’ll have to pay taxes on that amount — plus a penalty. An IRA is a long-term investment tool that allows you to maximize your earnings. You can contribute up to $6,000 each year in an IRA and deduct it from your taxable income. This lowers your monthly bills and allows you to save more for the future.
There are many ways to grow your wealth, but CDs and IRAs are two of the most effective. They offer a great interest rate, which helps you reach your savings goal faster. And they help you diversify your investment portfolio, which is crucial for reducing your risk.
If you’d like to achieve financial security, start opening a CD or an IRA. This way, you can start growing your wealth right away.
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