Investing 101
IN THIS LESSON
Investing is a crucial step toward building long-term wealth and securing your financial future.
Understanding the fundamental differences between checking accounts, savings accounts, and investment accounts, and why investing offers the potential for long-term wealth accumulation and growth.
In this guide, we’ll explore these topics in detail to help you make informed decisions about managing your money and planning for the future.
Checking, Savings, and Investing
When it comes to managing your finances, understanding the distinction between checking, savings, and investment accounts is crucial. In particular, investments are vehicles designed to grow your money over time. So when thinking about each account type, it’s important to note the time horizon you plan to keep your deposits in each account.
Checking Accounts
A checking account is a basic financial tool used for everyday transactions, such as paying bills, making purchases, and withdrawing cash. Funds deposited into a checking account are typically easily accessible and can be withdrawn at any time using checks, debit cards, or electronic transfers. Checking accounts usually offer little to no interest on deposits, making them better suited for short-term cash management rather than long-term savings.
Savings Accounts
A savings account is a basic financial product offered by banks and credit unions. Its primary purpose is to provide a safe and accessible place to store your money while earning a modest amount of interest. Savings accounts are typically used for short-term financial goals and emergency funds.
Key Features of a Savings Account: Safety: Savings accounts are FDIC or NCUA insured, meaning that your deposits are protected up to a certain limit. Accessibility: Funds in a savings account can be easily accessed through ATM withdrawals, online transfers, or in-person transactions. Interest: While savings accounts offer interest, the rates are usually lower compared to other investment vehicles. We recommend a high-yield savings account to take advantage of higher interest rates.
Investment Accounts
Investment accounts, on the other hand, are designed for long-term wealth accumulation and growth. Unlike checking accounts, investment accounts allow individuals to invest their money in various financial instruments, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Investment accounts have the potential to generate higher returns over time, but they also come with greater risk and volatility compared to checking accounts. Common types of investment accounts include brokerage accounts, retirement accounts (e.g., 401(k), IRA), and college savings accounts (e.g., 529 plan).
While cash is necessary for day-to-day expenses, savings is key for short-term needs, investing offers the potential for long-term wealth accumulation and growth.
Next in Lesson 2 of Investing 101, we’ll break down compound interest why investing is crucial for individuals of all ages and income levels.