Probably the most daunting hurdle in your quest to get smart about your money and build wealth is the very first step: getting started.
Dealing with money can seem scary and feels like a huge chore, so it gets treated like the laundry you don’t really want to do — left in a dark corner until it starts to smell a little.
The trouble is that time is one of the most important parts of the wealth equation. Given enough time, even a small amount of money can grow into a tidy sum.
So how do you get started building that little nest egg of yours when you are young, inexperienced, and probably not rolling in cash?
The trick is to keep it simple to start. By taking advantage of 4 types of accounts, you can build yourself a great financial foundation.
The Basic Accounts
Checking accounts are one of the basic bank account everyone needs. They are usually where your paychecks get deposited and where the payments for credit cards, checks, and even PayPal, Venmo, and other online payment systems come from.
Quick Tip: Look for checking accounts that allow you to pull money from any ATM with no fees or will refund your ATM charges. It’s a nice little perk that you’ll appreciate when you don’t have to hunt down the “right” ATM in a hurry.
Most checking accounts don’t pay interest; you may find one that has an interest rate, but it’ll be really low, so don’t count on your checking account to make you any money. It also shouldn’t be the place you stash your cash for the long term. Keep a comfortable amount in it to pay your bills, but your savings belong somewhere else.
As boring as it sounds, the best place for your emergency fund or savings you might need soon is in a savings account. Savings accounts can do a lot of what checking accounts can, but, with higher interest rates and no checks or debit cards attached to them, they are designed to be better places for money to sit than checking accounts are.
Not every checking or savings account is alike, however, and I would suggest using a tool like Magnify Money to shop around and find accounts with a decent interest rate and no weird hoops to jump through. Remember, there’s no rule that says your checking and savings accounts have to be with the same bank. Mine aren’t.
Many of the savings accounts with the best interest rates are online-only banks, which means you’ll have to have a checking account to connect to the savings account in order to add or remove money.
Personally, I like the idea that I have to wait a couple days for access to my online savings. The delay makes it really hard to spend that money. However, if you want or need access to your money more immediately, you might want to stick to a checking account or a savings account with a big-name bank that has physical locations. Just know you will be sacrificing interest rate for convenience.
As you get further along in your financial journey, you’ll be able to move some of that cash around and maybe make some more advanced decisions on how to save or invest it, but for your initial emergency fund, I think a savings account is the way to go. Hop over to our post on choosing the right savings account for more help with getting yours set up.
Investing is where you can really kick up your wealth-building game. Once you’ve gotten the hang of using your checking and savings accounts, investing is the next step. Without investing, anyone with an average salary is just not going to be ready for retirement.
If you’re a little lost when I say “investing” take a look at our What is investing? article, then pop back!
Everyone needs some kind of retirement account. If you’re lucky enough to have a job that offers a 401(k), that should be your primary retirement account while you’re in that job. Other people might have IRAs, 403(b)s, or another type of account. Many have some combination of these.
Why open a retirement-specific account? Unlike standard savings accounts, these accounts are designed to be ideal places for your retirement savings. By investing your money in a retirement account, you’re likely to see much greater returns than in even the highest-yielding savings account.
Also, if you get on board with a retirement account offered by your employer, you’ll probably also have the opportunity to get some free matching money from that employer.
Even better, contributing to your retirement account often comes with immediate tax benefits, so you could be doing yourself a double favor by saving for your future and getting a tax break. Even those accounts that don’t give you a break on the money you put in usually make up for it with a tax break on the money once you begin to pull it out of the account in retirement.
Every type of retirement account allows you to invest the money you put into it. Some accounts offer more limited options than others, but there’s always a way to help your money grow while you’re just going about your everyday life.
If you’ve got a full, safely stashed emergency fund AND you’re maxing out your retirement accounts, the next easiest way to invest is through a brokerage account.
Brokerage accounts allow you to buy and sell stocks and bonds. These are TAXABLE accounts, so any gains you get when you sell what’s in them will be taxed as income that year, so be careful. For those of you with money nerves, a couple of low-cost funds and maybe a bond or two are the easiest and least dangerous ways to invest a brokerage account’s money.
The advantages of a brokerage account include the fact that the money in them is pretty liquid, which means you can take it out of the account at any time without penalty, unlike a retirement account. You could think of a brokerage account as like a checking account, except you invest the money instead of keeping it in cash. The danger, of course, is that your investments could lose value and you could end up with less money than you started with. A good rule is to not invest any money that you think you will need in the next couple of years.
I strongly encourage you to learn all you can about how stocks and bonds work before jumping into this pool. It can be rewarding, but it can also be dangerous for anyone who thinks they can game the system and make tons of money on trading. The market doesn’t work that way.
And there you have it: a basic, 4-account map of how to get started with money.
Can be money be way more complicated? Heck, yes.
Does it have to be? Not if you don’t want it to be.
By keeping things simple with your everyday money in checking and savings, you’ll minimize the effort it takes to track your income and expenses. Taking advantage of your retirement and brokerage investing options guarantees that your future self will have money when he or she needs it.
Quick Tip: Using a platform like Mint or Personal Capital can take the effort out of checking on your finances. After linking all your accounts to the program, you just need to open the app to see how much money you have in each account.
How do you keep your money simple? Share your methods!
Disclaimer: None of the companies, apps, or websites mentioned in this article paid me to mention them. I just like ’em!