There are a number of strategies when it comes to investing your money with a bank. With so many different banks and investment options, it can become a daunting task very quickly. Every individual's financial situation is different, so which investment options are best for your financial situation can vary greatly from your neighbors.
Laying out a timeline
One of the most important factors to consider, is the investment timeline you are looking to invest for. Is there a specific reason you are looking to invest the money? Common reasons include home down payments, emergency savings, or investments to generate additional future income.
Additionally how long are you planning on investing this money for? Are these short-term investments or long-term investments? Short-term investments are generally considered less than two years, while long-term investments can range anywhere from a few years to decades.
Once you have determined your objectives, there are a number of suitable investments you can consider to help you meet your goals. Some of the best and most common short-term investments include CDs (certificates of deposit), high yield savings accounts, and government bonds.
Money that is intended for emergency savings funds and down payments should be invested in accounts that allow you to withdraw the money at any time without any penalties or fees. It's vital these funds are liquid for your own peace of mind and financial security. Down Payment funds should also be invested in a way that preserves the capital while also allowing access to the investment. It would be frustrating to be saving money for a downpayment and seeing the investment lose value.
Regardless of which investment vehicle you choose, always pay attention to how the investment is compounding. The more frequently the better, as interest that has accumulated can be reinvested more frequently.
Interest rates are also important when it comes to short-term investments. As interest rates rise or fall, this can affect your investments. Generally the higher the interest that is offered on the shorter the investment, the better.
High Yield Savings Accounts
A good choice and simple choice for any short-term investment is a high yield savings account. These accounts generally allow the investor to withdraw the money at any time without any penalty or fee. Many online banks offer high yield savings accounts with interest rates that are much higher than some of the more traditional banks.
If you currently have a savings account with a traditional bank, you may want to consider switching to a high yield account as the interest rates offered are generally much higher. For example if you have $100,000 invested at a rate of .10 percent, which is a generous interest rate at many banks, you will generate about $100 per year, depending on how the money is compounded over the year. Now, if that money were invested in a high yield savings account at 2%, you would generate over $2,000 per year in interest depending on the compound rate. Over the course of the year the dollar amount difference is pretty large. This could help cover closing costs on a mortgage or a number of other bills you may incur over the year.
Many high yield savings account also offer customers new account promotions for signing up and depositing a certain amount. Generally the more you deposit the higher the promotional amount. This gives short-term investors an additional source of income and higher rate of return. The promotional amounts are usually a few hundred dollars depending on the dollar amount invested and the promotions being offered by the bank at that time.
Certificate of Deposit (CD)
A CD is also a preferred short-term investment. Most CD rates are currently between 2-3% depending on the CD length and terms. Some CDs are 6 months while others can be a year or two. It is important to note that money invested in CDs is not always accessible right away without paying a penalty or early withdrawal fee, so while the interest rates that are offered are higher, there is less liquidity that is afforded to investors.
Because of that, it's always a good practice to ladder CDs that are purchased. For example, you could purchase a 6 month, 1 year, and a 2 year CD. If a situation does arise where the invested money is required, there is a greater chance that some of the funds will be available and fewer fees and penalties are incurred.
Government Bills and Notes
U.S. Government bills and notes are another option for short-term investors. Treasury Bills have maturities that can be bought from a few days to a year. Treasury notes have maturities that start at 2 years. U.S. Government debt is generally considered one of the safest investments that exists. Investors can purchase federal debt directly from the government.
When purchasing long-term investments, especially in the stock market, there are a number of guidelines investors should consider. Emotions and expectations are a big factor. Long-term investments are not going to make you rich overnight, but over time they will generate a pretty rewarding return. The stock market fluctuates every day, and although it can feel great when the market is going up, the opposite will be true when the market is dropping. Refrain from checking your investments every day. They are long-term, so you only need to monitor them periodically.
Playing the Stock Market
Long-term investors should not attempt to time the market. Time in the market is always considered preferable to timing the market. Timing the market is such a difficult task with so many variables that many industry professionals do not have the ability to do so.
Additionally, if you are nervous about investing a large sum of money into the stock market at once, you can invest the money over a period of time that you choose: a few days, weeks, or months. This can protect you from minor market corrections or fluctuations that may occur in a day or over the span of a week.
Another good practice is investing a set amount of money over a time. For example you may choose to invest $200 dollars every time you receive your paycheck. Continually investing will lead to much larger returns over time.
Investors also need to diversify. Buying a specific stock or a select few creates far too much risk for the average investor. While a company may be performing really well, putting all your eggs in one baskets is far too risky.
Choosing the right fund
With so many different mutual funds, index funds, and exchange-traded funds (ETFs) available it can be a difficult task choosing the right ones. There are a number of brokerages that offer a number of low cost options for index funds, mutual funds, and ETFs. Vanguard is generally considered the leader, however, other brokerages such as Fidelity, TD Ameritrade, and Schwab offer products that are not far off and are sometimes even better.
When picking a fund to invest in, always pay attention to the expense fees the fund charges. Expense fees are the amount that is taken each year to pay for operational costs to manage the fund. Fees above 1 percent are considered high, especially as there are so many cheaper options generally available that are comparable or better. There are even some funds that have no expense fees. For example, the Fidelity ZERO Total Market Index Fund (FZROX) has no expense fee. This fund invests in a broad range of stocks within the stock market. Schwab offers an S&P 500 Mutual Fund (SWPPX) that has an expense ratio of .02 percent, which is considered extremely low. This fund invests in companies that are part of the S&P 500.
Along with expense ratios it's important to consider the minimum investment required for a certain fund. Some funds require a minimum of $3,000 to invest while others have no minimums. Also look for any lockup periods or additional fees that are incurred when purchasing or selling the fund. Many financial information sites like Morningstar provide this information. It's also documented in the prospectus for each fund.
Diversification is key.
Long-term investors should considered ETFs, mutual funds, and index funds that invest in a wide range of stocks within different industries. Popular investments include total market index funds and S&P 500 funds. Additionally many investors purchase index funds that include small cap or mid size companies or stocks that fall within a particular benchmark like the Russell 2000. International stock index funds are also common. Long-term investors should consider a mix of these.
There are also a number of funds that invest in specific industries such as technology or energy. These can be good long-term investments, however, as the funds invest in a specific industry they are riskier because the fortunes of one industry can rise and fall greatly over the years. For example oil prices have a large effect on the energy industry, and, in turn, can cause big changes in the value of energy companies.