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Interest is the price paid for the use of Loanable Funds according to Loanable Funds theory. It asserts that the rate of interest is determined by the equilibrium between demand and supply of Loanable Funds in the credit market. The supply of Loanable Funds is derived from four basic sources, savings, namely bank credit and disinvestment. Savings by individuals or households constitute the most important source of Loanable Funds. In the Loanable Funds theory, savings are looked at in either or these two ways, firstly, as ex-ante savings, i.e., savings planned by individuals at the beginning of a period in the hope of expected incomes and anticipated expenditures on consumption. Secondly, savings of the difference between the income of the preceding period and the consumption of the present period.

Businesses is also save, like individuals. A high rate of interest is likely to encourage business savings as a substitute for borrowings from the loan market. But these business savings are often demanded for investment purposes by the firms themselves and, therefore, they don’t enter the market for Loanable Funds.

Dishoarding is absolutely another source of Loanable Funds. So, individuals may dishoard money from the hoarded stock of the previous period. Thus, cash balances, lying idle in a previous period, become active balances in the present period and are available as Loanable Funds. More will be dishoarded, at higher rates of interest. At the low rates of interest, there is a greater tendency to hold on to money.

You will need to open up an investment account with your bank or an investment brokerage firm, in order to purchase different types of investments. Here are the typical accounts that you can open:

Individual Retirement Account (IRA). This is a great account to invest money for retirement because it provides tax advantages. The money placed in an IRA is considered pre-tax and you pay no taxes on returns until you take the money out. Because you do not have to pay taxes on your money it will grow larger. You can contribute $4,000 per year tax free. Individuals aged 50 and older can contribute up to 100% of earned income or $5,000 whichever is less. Nevertheless, you will have to pay taxes PLUS you may have to pay an additional penalty if you pull out your money before you reach 59 ?.

401(k) Plan. Many employers offer a 401(k) plan to their employees. This allows you to have money pulled from your paycheck each month and invested in mutual funds before tax. In addition, employers will typically match your investment up to 6% of your income. If your employer offers a 401(k) plan you should be investing as much as possible in it.

Individual investment account. This type of account will allow you to buy and sell (on your own or with the help of an advisor) without restrictions; however, there are no tax advantages.

Roth IRA. A Roth IRA is similar to a regular IRA, except that it is after-tax money. Therefore, you do not get an additional tax deduction for this type of account. Anyway, after the age of 59 ?, you can pull your money out tax free.

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