Investment Basics – Where to Start

We’ve been talking a whole lot about getting your financial life in order. Prioritizing debt repayment is the first of many steps, followed by building a solid emergency fund. Then comes saving in tax advantaged accounts, like 401(k) retirement plans and IRAs. But then what? You have made huge strides and now everything is in order, but you have money left over! Basically the best news ever. Shall we save? Shall we spend? Shall we (gasp) invest?

As you may have guessed, my gut instinct is telling me to book an uber lush vacation (I am thinking over-water bungalows with a private beach full of flamingos… not that I have given it any thought…). But I already account for travel and adventure in my budget (obvi) and I am in a good place on my travel spending. So what to do?

The next step is to start saving in taxable savings accounts.

And while this sounds boring as hell (except maybe to the Enemy of Fun), it is actually pretty sweet. You have lots of options for kicking off your taxable savings but there are two main options that I want to highlight. And one is arguably better than the other but both are available options.

Basic Savings Account

This is just your standard savings account… but the interest rates on standard savings accounts at any of the major banks are PITIFUL. You will actually lose money long term because the interest rates are lower than the rate of inflation. I am pretty sure that one of the savings accounts offered by my current bank is less than 0.2%… ridiculous.

This is the super risk averse approach. If you are worried about markets crashing or want to be able to take money in and out of your account frequently, savings accounts may be for you.

For me, I keep a bit of buffer in my savings account, just for the sake of having easy access to cash if necessary. But generally, I don’t keep much in here because I want my money to work for me… all the time. Which brings me to the next option – a brokerage account.

Brokerage Account

Investing. Investments. Brokerage Accounts. Management fees. (head explodes) These can all be intimidating concepts, unless you are talking about investing in a Louis Vuitton or buying shoes as an investment… that is not scary.

A brokerage account can work in several ways and you can pick how you want it to work for you, depending on your level of risk and your financial goals. In the most basic of terms, it is an account that you fund (either by cash or bank transfer). That money that is deposited into that account can then be used to purchase all sorts of investments (stocks, bonds, ETFs, money markets, REITs).

Each of those types of investments come with their own pros and cons, but more importantly the type of investment can be indicative of how much risk you will take on. The general rule of thumb is that the greater the risk, the greater the potential reward – the lower the risk, the lower the reward. Investing doesn’t necessarily mean taking on excessive risk and losing all your money. There are investments available that are low risk but have annual returns greater than the interest rates available on standard bank savings accounts.

It is worth noting that no investment is a *sure* thing. Even low risk investments still have a degree of risk. Your financial obligations and goals should determine the amount of risk you can take on.Β 

I am going to be posting in the coming weeks about how to start investing – identifying your financial goals, how/where to open an account, understanding your appetite for risk, figuring out where and how to invest your hard earned money, understanding the different types of investments available through a brokerage account.

Sincerely yours in fun and fiscal responsibility,

Rachel

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