When it comes to improving your financial stability and establishing wealth, your first goals should be to pay off debt and setup an emergency fund. As you continue along your journey, you’ll start to have more money to utilize. The question is, what do you do with it?
You can start by putting away more money into your savings account. Savings accounts are great for creating a cushion, whether its to protect against emergencies or to make large purchases. Savings accounts are safe, secure, easily accessible, and they compile interest.
That interest is pretty limited, however. In other words, money that’s sitting in a savings account isn’t going to do much work for you.
A CD (or certificate of deposit) is similar to a savings account in that it’s insured by a financial institution. Unlike a savings account, however, you can’t access your money anytime (without paying a penalty, at least). Instead, you have to keep your money in there for a certain amount of time.
On the upside, CDs come with a higher interest rates than savings accounts, especially when they have longer terms. Even still, the amount you make on a CD won’t be too substantial.
To really see interest compile and successfully grow your money, you’ll want to make some investments. The question is, how will you invest your money? You have a few options.
A stock is essentially a share of ownership in a business. The more that business is worth, the more your stock is worth. On the flip side, if that business loses value, so does your stock. Stocks are generally seen as the greater risk, greater reward option.
However, that can greatly depend on what you’re investing in. The risk and return of stocks ultimately come down to the type and size of company you’re investing in.
Bonds are often viewed as a middle ground between a stock and a savings account. Think of a bond as a personal loan you’re giving to a company or the government. Just like with a loan, a time period is set by which you’re owed the money back. In return for giving your money, you earn interest.
When you purchase a bond, the money you put in is owed back to you. On top of that, you’ll receive the interest, typically paid out in semi-annual payments. These payments may also be promised by the issuer of the bond.
Just like stocks, bonds can be sold.
If the value of your bond goes up, you can sell it for a profit. On the other hand, if your bond goes down in value, and you need to sell it before its maturity date, you can lose money. Inflation can also negatively impact the returns on bonds.
There are many different types of bonds, each with varying degrees of risk and return.
Mutual funds are pooled resources where your investment is combined with the money of other investors. This is then used to purchase blocks of assets such as stocks and bonds. A mutual fund comes with professional management, but it also offers you less control.
The risk is shared, but the returns are also shared.
Diversification and Professional Guidance are Key to Investing
When it comes to investing, it’s not about choosing one option over another. Instead, you should diversity your money across a variety of investment options. This protects you from market changes and mistakes, while continuing to grow your money at a higher interest rate than you’d see with a typical savings account.
With so many options to choose from, it can be overwhelming and confusing. That’s why it’s best to work with a professional who is experience in the different types of investing. For investment management in Springfield, Ohio, contact the team at KB&P today.