For some savers, the paltry returns offered by savings accounts make it hard to find the motivation to save their extra money. One way to achieve a higher rate of return on your savings is to open an investment account.
With an an investment account, you assume more risk, but you have access to a wider assortment of products, such as bonds, mutual funds, and individual stocks. Before opening your investment account, here are a few things you need to do.
1. Educate Yourself on the Different Offerings
Even if you plan to have an investment professional select the stocks and bonds that you buy and trade, you need to understand exactly what you are buying and why you are buying it. You should be able to identify if the adviser is choosing stocks because there are a good fit for you and have the knowledge to gauge the overall health of your portfolio.
Education is essential when it comes to successful investing. One simple way to learn about the different types of products is to take an online investing course. You'll learn the ins and outs of the major investment categories (such as large cap, mid cap, and small cap funds) and be able to identify which options best suit your needs.
2. Decide How You Want to Use Your Savings
Take a moment to decide how you ultimately want to use the money in your investment account. For example, you may want to use the funds to save for your retirement, or you may just want to earn a little bit more interest on your emergency savings.
This will influence what type of account you open. If your goal is to save for retirement, you'll want to open an individual retirement account (IRA). For college savings, a 529 plan is appropriate. A taxable investment account is a good match for other types of savings goals, such as for the down payment on a future vacation home.
3. Pick Your Initial Investment Strategy
If you have a lump sum that you plan to use for investing, you can either invest all of the money at one time, or you can invest a little bit of the money each month (dollar coast averaging). Both options have their risks and drawbacks.
With lump sum investing, you run the risk of investing at a higher point in the market (buying "high"). Dollar cost averaging helps you shield your savings from market fluctuations, as you make your monthly contribution regardless of how the market is performing.
Some types of investment accounts may have minimum balance requirement or monthly contribution amount, so keep these details in mind when evaluating your options.
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