Company-sponsored 401 (k) plans (named after the section in the tax code that allows them) are widely used and are very popular. In a 401(k) plan, companies set aside money from their paychecks that the employees can use to invest for retirement.

Generally, you can invest as much as $11,000 of pretax earned income and have it grow tax deferred. Usually, the money is in a mutual fund through a mutual fund company or an insurance firm.

Because your money is in a mutual fund that may invest in stocks, take an active role in finding out the mutual funds in which you're allowed to invest.

Most plans allow you several types of stock mutual funds. Use your growing knowledge about stocks to make more informed choices about your 401(k) plan options.

Keep in mind that a mutual fund is only as good as what it invests in. Ask the plan administrator some questions about the funds and the types of stocks it invests in. Are the stocks defensive or cyclical?

Are they large cap or small cap? If you don't make an informed choice about the investments in your plan, someone else will - someone who doesn't have as much interest in your financial success as you do.

What Are Bonds?

A bond is similar to a certificate of deposit (CD). With a five-year CD, for example, a bank agrees to pay you a set interest rate, say, 6 percent. If all goes according to plan, at the end of five years of earning the 6 percent annual interest, you get back the principal that you originally invested.

Bonds work in a similar fashion. For example, you can purchase a bond, scheduled to mature five years from now, that is issued by a company such as the retailing behemoth Wal-Mart. A Wal-Mart five-year bond may pay you 7 percent. As long as Wal-Mart doesn't have a financial catastrophe, after five years of receiving interest payments on the bond, Wal-Mart returns your original investment to you. So, in effect, you're loaning your money to Wal-Mart (instead of the bank when you deposit money in a bank account).

The worst that can happen to your bond investment is that Wal-Mart's business goes into a tailspin and the company ends up in financial ruin (bankruptcy). If that happens, you may lose all of your original investment and miss out on some of the expected interest.