Making Smart Investments: I Have My Emergency Fund, What's Next?

May, 17 2020

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Saving money each month is not always an easy task, but a rewarding and important one. This is especially true if you have a growing family or fresh out of college and yet to find a job, for example.

If you've been wise enough to put money away over the past few months or years, here's how to take the next step and make it grow with smart investments. 

Investing Vs. Saving Money 

What’s the difference? Both saving and investing money have a place in the timeline of your life and that's what separates the two – timing.

Saving money means putting money aside – it’s money you can afford to save. Some months you may be able to save more than others.

This money usually goes into a bank account you can access on short notice. This is how an emergency fund is built. Put savings aside each month, until you have a decent amount of capital to invest. And keep in mind, you can start investing with as little as $5.

Investing is the process of using money to buy an asset that has a decent probability of earning you more money. Investing should be based on the premise of a safe rate of return over time. An investment may even decrease at times, but should have the potential to increase the amount you originally invested over time.

If you have a decent emergency fund saved up, it's time to invest.

Smart Investments 101: How to Grow Your Emergency Savings Fund

You've probably been putting your money into a standard savings account, and that's OK. But characteristically, bank savings accounts offer low interest rates. So, you might want to think about moving it to a place where it can grow faster.

1. A High-Yield Savings Account

This is similar to a regular bank savings account but offers a higher interest rate and return on investment (ROI). This means the amount will naturally grow faster. However, access to the account is limited. This is a good thing so you can leave your money to grow, untouched! Make sure to shop around for the best high-yield savings account rates beforehand. Keep in mind, these accounts have protection from the Federal Deposit Insurance Corporation (FDIC).

2. A Money Market Fund

If you're looking to invest your money a money market fund is a great place to start. Money market funds are investments in low-risk securities, so they're great for beginner investors. These are considered one of the lowest risk types of investment funds.

Money market investments provide a return similar to short-term investment rates. However, they are not usually FDIC insured. You can find money market investments with your local bank and brokerage firms. But make sure you do your research beforehand so you know their performance. 

3. A Certificate of Deposit (CDs) 

Most banks and credit unions offer the opportunity to put your emergency fund into a certificate of deposit (CD). These deposit accounts are FDIC insured and offer a higher interest rate than other deposit accounts.

But they require more to get started, as well as a longer term of deposit. You have to keep your money in the CD for a specified amount of time, or you could face a penalty if you choose to withdraw it. These time periods vary from 6 months to 5 years. Interest earned during this time is added to the CD when it matures.

A CD account allows you to stagger your investment. This means you can take advantage of higher interest rates over time, which could earn you more money.

4. Riskier Investment Options 

When it comes to investing your money, you have several options. Some with more risk include:

  • Bonds - this is a fixed-income investment where your money is borrowed by a company to fund a project. You receive regular interest payments as an investor 
  • Stocks - purchasing an individual share of a company that holds good potential, meaning your share may increase in value
  • Mutual funds - investing your money in a number of avenues, including stocks, bonds, and other investments. This builds instant diversification 
  • Real estate - this doesn't mean buying a home or property. You can invest in real estate investment trusts (REITs), similar to mutual funds, but secured by real estate

All of these options carry a degree of risk. They also have different return rates and maturity periods. It's wise to work with an investment professional if you're a first-time investor. They can guide you in the right direction and help you make solid investment decisions for the best return on investment (ROI). 

5. Investments for Your Future  

Looking to establish a plan for your long-term future? Then you want to start investing in a retirement account. The most popular options are:

  • Traditional individual retirement account (IRA) - this is a retirement account you can open if you don't already have a 401(k) through your employer. Your contributions are tax deductible, however retirement payouts are taxed as ordinary income
  • A Roth IRA - similar retirement investment as a regular IRA, but with the opposite tax treatment. Your contributions are made after-tax, so you don’t pay tax when you withdraw it
  • A taxable account - also known as a non-retirement account. This is a flexible account that doesn't have to exist for any purpose, except saving for your future. There are no specific rules on contribution amounts and you can withdraw money at any time. However, this account has no tax advantages

There's also the option of opening a college savings account for yourself or your children. These work similarly to retirement accounts and offer tax advantages when saving for this particular purpose. Popular options include the 529 account and the Coverdell Education Savings Account (ESA). 

Take Control of Your Money Matters

We hope these ideas on smart investments offer guidance on what to do after you’ve built your emergency savings fund.

No matter which option you choose, the most important part is simply starting. You can always decide down the road to switch your strategy. The more you can learn about each type of investment, the better. That way you’ll feel confident about your investment decisions.

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