In the past, folks were encouraged to put away a part of their earnings for a rainy day. The average person would deposit a portion of their monthly income in a savings account without worrying too much about hustling to earn returns. Today, more and more people are finding that they can put away cash for a rainy day.
If you’re smart with your investments, you can save money responsibly and also earn a decent extra income while you’re at it. And you don’t have to wait for a sudden windfall to try investing. You can get started right away by committing a little bit of your salary or wages to an investment account.
Types of Investment Accounts
There are different types of investment accounts suited to investors at different stages of their lives and careers. Choosing the right account for you means considering what accounts you’re eligible for, how much money you’re comfortable putting away out of your paycheck, when you’re hoping to withdraw it, and what your overall goals are for your investments.
Standard Brokerage Account
This is an ideal investment vehicle for the forward-looking person. You can set up your checking account to automatically divert the amount you wish to commit to investing into a brokerage account each time you receive a paycheck. There are no limits to the amount you can commit to this account, and you can also withdraw as much as you want.
This option is ideal if you want to pool investment resources with your better half, as it allows joint ownership of the account. It is a wise option in terms of potential returns, which will spread your funds across various investment instruments. Your money will be put into exchange-traded funds, mutual funds, bonds and a variety of stocks, so you won’t end up with all your eggs in one basket.
This account is also called a taxable brokerage account because your earnings are subject to capital gains taxes.
Individual Retirement Accounts (IRAs) offer investment through more or less the same instruments as a standard brokerage account and are also available to small business owners and the self-employed.
You can save for retirement using either a Roth IRA or a Traditional IRA. When contributing to a Roth account, you are depositing money on which you have already paid taxes so that it grows tax-free. When you retire and withdraw from the account, you won’t have to pay taxes on your earnings. With a Traditional IRA, you deposit pre-tax funds and your withdrawals after retirement will be taxed as current income.
You can also claim certain tax breaks either at the beginning of the year on contributions to the account or when making withdrawals during your retirement years. Unlike a standard brokerage account, you cannot make withdrawals whenever you please. As of right now, you can start withdrawing from your IRA penalty-free at age 59½. Unlike a standard brokerage account, your IRA cannot be a joint account.
If you have a 529 savings plan for your child’s education, you already know what an education account is. Although there are multiple types of education savings accounts, the 529 is the most popular, primarily due to its wide availability.
It is essentially a way of saving for a child beneficiary (you do not need to be related to the beneficiary) to help them fund their education down the line. Most U.S. states offer 529 plans, and you can open one through your state government and use the money at any school in the country. While your contributions to 529 and similar plans are taxable, some states offer a rebate on the tax levied.
Investment Accounts For Kids
For some, the best way to teach your kids the importance of investment is to let them have their own supervised account. There are several options available to you for this purpose. A custodial brokerage account will allow you to open an account on behalf of a minor and deposit a starter investment. When the child is above the age of 18, they can assume control of the account.
When they receive the funds, the beneficiary can use them for any purpose. Unlike the money in a 529 plan, it is not specifically earmarked for education.
The Basics of Investing in Stocks
Stocks Vs. Bonds
If you’re brand-new to investing, you may not yet know the difference between two of the most common investment avenues: stocks and bonds.
Stocks are traded in the stock market, where securities from different companies are traded on an exchange. By purchasing stock from a company entity, you are essentially buying a stake in that company, which gives you a small degree of ownership of that company. When that company profits, you do too. When they are performing poorly, your stock loses value accordingly.
On the other hand, bonds are issued mainly by the government, though large corporations can issue them as well. These bonds are not traded in exchange but over the counter. When you buy into a government bond, you are essentially lending money to the government for a specific period at an agreed rate of interest.
Bonds are considered less risky than stocks because the set time and interest rate ensure that you should know exactly how much money you’re getting back and when.
Do Your Research
Whichever avenue you choose to invest through, your chances of making good returns will always depend on the amount of research you do before investing. Before you buy a company’s stock, get to know its performance history and take a close look at how various factors, including its organizational culture and competition, will affect its future.
You can get this information from the company’s published financial reports and any news and trade coverage. If you don’t have the time for such scrutiny, you can make informed investing decisions with investment research tools.
Some investment research tools are designed for easy beginner use, while others provide more seasoned investors with greater flexibility and detail. Some even allow you to simulate the performance of a stock in the future.
Know Your Risk Tolerance
If you own a stock that starts trending poorly, you may feel pressure to sell before the losses can grow. Alternatively, you may find that you’re comfortable riding out the rough period and waiting for the returns.
Some people can tolerate more risk than others and therefore make bolder investment decisions that can pay big if they work out but will also have more costly consequences if they don’t. Some people would rather be more conservative and make safer choices to grow their savings slowly and steadily without exposing themselves to too much risk.
Much of this decision is based on your age and investment goals—if you’re hoping to retire using your investments sooner rather than later, play a safer game is probably the smart choice.
Know Your Position Size
Your position size is the level to which you’re invested in a particular company. Shrewd investors will spread their investment across a variety of stocks (in addition to other products).
If you’re interested in a particular company but want to watch how they perform before fully committing, you can always start with a smaller position size and increase your investment down the line.
Controlling your position in the different stocks well will ensure you get the most out of your investment portfolio as a whole. It also helps mitigate the chances of a single trade putting your entire portfolio at risk.
Track Your Investments and Start Earning Today
Your investment bank or broker will provide you with tools you can use to keep track of your investment portfolio. Besides periodic statements, they will give you online access to your portfolio through a mobile or desktop app. Make good use of these tools to help you react to market movements in good time.
Investing gives you an additional source of income that can help make ends meet, give you some extra spending money for the holiday you’ve always dreamed of, help you purchase your first home, and even bolster you after retirement.