Money Market Funds

Money market funds are a specialized form of mutual fund that invests in extremely short-term bonds. Unlike most mutual funds, shares in a money market fund are designed to be worth $1 at all times. Money market funds usually pay better interest rates than a conventional savings account, but below what you could get in certificates of deposit.

Certificate of Deposit (CD)

This is a specialized deposit you make at a bank or other financial institution. The interest rate on CDs is usually about the same as that of short- or intermediate-term bonds, depending on the duration of the CD. Interest payments are made at regular intervals until the CD matures, at which point you get the money you originally deposited plus the accumulated interest payments. CDs offered by banks are usually insured.

Bonds

Bonds come in various forms. They are known as "fixed-income" securities because the amount of income the bond generates each year is "fixed," or set, when the bond is sold. Bonds are very similar to CDs, except that they are issued by the government or by corporations instead of banks.

Stock

Stocks are a way for individuals to own parts of businesses. A share of stock represents a proportional share of ownership in a company. As the value of the company changes, the value of the share in that company rises and falls.

Mutual Funds

Mutual funds are a way for investors to pool their money to buy stocks, bonds, or anything else the fund manager decides is worthwhile. Instead of managing your money yourself, with a mutual fund you turn over the responsibility of managing that money to a professional.

Retirement Plans

There are a number of special plans designed to create retirement savings, and many of these plans allow you to deposit money directly from your paycheck before taxes are taken out. Employers occasionally will match the amount (or age of that amount) you have withheld from your paycheck up to a certain age of your salary. (That's what we affectionately call "free money.") Some of these plans permit you to withdraw money early without a penalty in order to buy a home or to pay for education. If early withdrawals are not permitted, you may be able to borrow money from the account, or take out low-interest secured loans with your retirement savings as collateral. Rates of return vary on these plans depending on what you invest in, since you can invest in stocks, bonds, mutual funds, CDs, or any combination.