After you’ve read part one and are ready to invest, the best time to start is now! You may want to consult a financial advisor to gain a solid understanding of potential market risks, how much of those risks you are willing to tolerate, and your timeline for reaching your financial goal(s).
Need some inspiration? The chart below demonstrates the “magic of compound interest”—the wealth-building cycle of continuously earning interest on the interest your investments have earned.
Here are basic investment facts to get you started.
Types of Accounts
Checking Account – This is a transactional account where you stash the money you need for immediate bills and purchases. If you keep enough in the account for about a month’s worth of expenses, you earn interest on your money and avoid overdrafts.
Savings Account – A great place to keep your emergency fund and save for specific purchases such as trips, holiday spending, or new furniture, all while earning interest. You will be less tempted to spend the money on immediate gratification than if the money was in your checking account. Your savings are also generally government-insured and protected from fraud and identity theft.
Brokerage Accounts – Unlike a checking or savings account, a brokerage account allows you to use the money you deposit to purchase investments. You open the account with a brokerage firm or investment company, which purchases investments on your behalf. You own the money or investments held in the account. You can choose from basic investments such as CDs, stocks, bonds, and mutual funds, or explore riskier and more complex choices such as options and futures.
Retirement Accounts – Whether offered by your employer or purchased by you, tax-deferred or tax-exempt, the accounts available for retirement savings should be part of your long-term investment strategy. See our retirement planning blogs for more specific tips.
Types of Investments
Once you determine your risk tolerance, it is time to decide on the mix of cash, bonds, and stocks in your accounts.Risk and return are related, meaning the higher the risk, the higher the potential earnings. Cash is the least risky investment with the lowest earning potential. Stocks are the riskiest, but also hold the greatest potential for growing your money over the shortest timeline.
Check the FJY blog for more detailed tips on investing. Meanwhile, here are some basics to consider as you explore your options:
- Cash includes interest-bearing checking and savings accounts (see above).
- Bonds represent a loan made by an investor to a borrower, typically a company or government. Bonds are considered solid fixed-income investments with payments concluded by an end date, with less volatility than stocks.
- Stocks represent ownership in shares of the issuing company and are usually bought and sold on stock exchanges. Stockholders receive company dividends when distributed.
- Mutual Funds/Exchange-Traded Funds are baskets of cash, bonds, and stocks that allow investors to benefit from a mix of low risk/low yield investments and higher-risk securities.
- Target Date Funds are one great way to start investing. Target date or lifecycle funds are included in many employer-sponsored retirement plans. These funds invest in a combination of stocks and bonds keyed to your selected retirement year. As your retirement approaches, your fund will automatically adjust to a more conservative investment mix that includes a higher proportion of bonds.
When you are ready to create an investment strategy designed specifically for your personal circumstances and life goals, feel free to contact our financial experts to sort through your many options. FJY is passionate about educating the next generation of investors.