The major difference between savings accounts vs. investment accounts is that savings accounts are FDIC insured and most investments are not. FDIC stands for “Federal Deposit Insurance Corporation” and it was created as part of the “New Deal” by FDR (Franklin Delano Roosevelt.) FDR was the 32nd President of the United States and served 4 terms. After the Great Depression, many were afraid to put their money back into banks. The government, in response to this, created the FDIC. Typically, FDIC insurance covers CDs, Checking and Savings accounts. The FDIC guarantees if the bank you bank with fails the FDIC will reimburse your money $1 for $1 up to $250,000.00 raised from its previous amount of $100,000.00.
Savings accounts pay an interest rate. Saving’s rates can move with the Prime Rate. The Prime Rate is the interest that commercial banks charge their most credit-worthy customers, and we will cover this in another blog. In savings accounts the money is liquid, meaning you can access it whenever you like.
When we discuss investments, we are discussing non-FDIC insured instruments. Mutual funds, stocks, and bonds are usually non-FDIC insured. Mutual funds are a common type of investment held in 401Ks. Mutual funds, stocks, and bonds are commonly traded on the open market. Like anything you sell a car, a house or jewelry, you need to have a buyer. Most mutual funds are “open mutual funds”, this means that the fund family will buy the shares back from you. By investing in an “open mutual fund” the risk of not having a buyer is eliminated. It’s kind of like selling your car to a dealership, most times they buy it from you regardless of condition. When the fund company does this it is called “making a market” for your shares. Just because the fund company purchases your shares doesn’t mean it guarantees the price, they will just buy them back. It is important to note that not all mutual funds are “open.” Some mutual funds only have certain days of the month that you can redeem shares. For example if on the 5th you want to sell your shares but your mutual fund only allows you to redeem shares on the 20th then you must hold your shares until the 20th. For the 15 days you are waiting for redemption your balance will still be subject to market fluctuations. On the 20th when your shares are finally redeemed you will get whatever the market price is at that time. Make sure you consult with your CFP® to know what you are investing in and any restrictions that might apply.
To wrap this up in a nice bun (not a man bun, those are stupid) savings account and checking accounts are FDIC insured and do not fluctuate in value. Non-FDIC insured investments can and will fluctuate depending on a variety of conditions.
So why invest? Inflation my friend and that is covered in another blog.
If you have questions on investing, or want to tell me how great I am, hit me up on twitter @melrocksmoney, or email me at firstname.lastname@example.org
-Rock On- Mel O CFP®/Rocker Chick Extraordinaire
C-Blocker Disclaimer-Investing in mutual funds and other investments involves risk, including possible loss of principal.