Chapter Four (Continued Part 1)
Why Invest and What to Look For?
The simple answer to this question is that interest can help to keep the value of your money over inflation. Many people who only use a traditional savings account to hold money for long periods of time can lose money due to inflation rates. If the rate on your savings account doesn’t match or exceed that rate, then it could be an opportunity to find other means to retain the value, if not increase the value of the money you worked hard for. Responsible investing can be a way to maximize that increase in value.
For example, Chapter 35 recipients may receive a monthly stipend that allows for a surplus after the cost of attendance is covered; this provides a great opportunity to utilize high-interest savings accounts or even retirement accounts such as a Roth IRA to make the most of any excess funding. Retirement planning can be a complicated subject. We encourage you to check out our retirement planning module to expand on it more. If you don’t know where to start, one of the most important things to keep in mind is the type of interest accruing on your account. Retirement accounts traditionally are vehicles for long-term goals. To maximize the time value of money, compound interest + more time is your best option.
Simple vs. Compound Interest
When opening an account, it’s essential to understand what they’re offering regarding interest.
Simple interest means that when you receive an interest payment, it is based on only the original amount invested.
Compound interest means that when you are paid interest, each payment is based on the original amount plus any interest already paid. This can really add up!
Time Value of Money
The Time Value of Money simply means that money in your hand today is worth more than that same amount at a later date because you can invest the money you have today at a given interest rate. Doing this makes the dollar you invested today more valuable than saving that dollar in a no or low-interest account. When you utilize compound interest, you can maximize the value of your money to set yourself up for your future.
Focus on Long-Term Investments
Prioritize investments that offer growth potential over time, such as:
- Employer-Sponsored Retirement Plans: These are plans provided by an employer that allow employees to maximize their money further. This can include things like employer contributions/ matches (free money!), reducing taxable income (saving money on taxes), saving money on health care expenses, etc.
- Individual Retirement Accounts (IRA)
- Traditional IRA: With no income limitations, these accounts allow for pre-tax contributions, reducing taxable income when you contribute to the account. These are great for individuals who may currently be at their peak income level and expect to live on less income during retirement.
- Roth IRA: As of 2024, single individuals with a gross income of less than $146,000 can contribute to a Roth IRA. This account allows tax-free growth and withdrawals in retirement, which can be particularly beneficial for anyone in a lower tax bracket who expects to be in a higher bracket by retirement.
Click here to learn more about the long-term investments and retirement options mentioned above.
Table of Contents
Chapter One: Welcome to Money Bootcamp
Chapter Two: How Can I Decide Where to Live? Maximize Your Benefits Beyond Paying Tuition
Chapter Three: How to Manage Benefits Effectively
Chapter Four: Logistics, Factoring in Saving and Investing