When you decide that you are going to invest, there are a couple of different things that you need to understand. First, you need to understand where your money is going to be invested. Second, you need to know what kind of account your money is going to be be invested in. And third, you need to know how it is going to be invested.
 
Discount Brokerage or Full Service Firm
 
When you are choosing where to invest your money, you need to decide whether you want a Discount Brokerage or a Full Service Firm. Discount Brokerage Firms allow you to open and manage your brokerage account. They are provided through places like Vanguard, TD Ameritrade, or eTrade. When you have a brokerage account through these companies, you are going to place your own trades. The cost to trade is going to be less expensive because you are going to have to do your own homework and act as your own stock broker.
 
Full Service Firms are companies like Ameriprise, Edward Jones, Raymond James, or Morgan Stanley. Through these companies, you receive full service options. You will have the choice to select a stockbroker, financial advisor, and/or insurance agent. Somebody will work for you to help you to plan and make your investments. You are going to pay more for full service than you are in the discount world.
 
Makes sense because they are not just placing your trades. Placing trades is the easier part. Your advisor’s skillset shines when picking out the investments that are suitable for your risk tolerance, time horizon, and investment objective.
 
Name That Account Type
 
It’s important to know what kind of account you have signed up for. People will tell me, “Oh, I have investments because I have an IRA account.” You could have an IRA account that is acting as a bank account where the money is not invested. When you are picking out your account, there are different purposes for each account type. Some accounts are for college. Some accounts are for retirement. Some accounts have no strings attached. There are accounts that are brokerage or personal brokerage and some for personal retirement.
 
When it comes to college, you could have a 529, Coverdell ESA, UTMA or UGMA account. When it comes to retirement, there are lots of different retirement options. This is where you want to pay attention to what rules go with what type of account. For example, a retirement account means that you have to wait until you are 59 and a half to access the money. If you need to access the funds sooner, some have penalties or tax consequences. Anytime an account has a number at the beginning of it, such as 529, 401, 403b, this means that the government is involved. That number stands for something in the tax code.
 
You want to pay attention. If you are investing your money into an account that has a number at the beginning of it, you are involved with the government in some way, shape or form. It is good and bad at the exact same time because anytime the governments involved, there are strings attached. This is what you would want to be talking to your financial advisor about. If you’re in the discount world, you want to do your homework to make sure that the account you have chosen matches what you are going to be doing with it.
 
Common Account Mistakes
 
A big mistake that I see pretty often is when people sign up for retirement accounts and invest money they will need to access prior to 59 and a half years of age. If they withdrawal this money early, they are going to pay a penalty. They go through all sorts of heartache when really they could have opened a brokerage account. Another mistake I see people making is opening a 529 when they need a a brokerage account or bank account without the need for all the bells and whistles that come with a 529 account. Prior to opening the account, make sure you identify what you will be using the money for and when you plan to access the funds. The answers to these questions will help you decide which account is best for you.
 
I’m Ready to Invest
 
Now that you have decided on an account and provider, you want to choose how to invest your money. Cash is always going to be your safest investment. Then, there are bonds, which are income investments, and then you get into the equities market where you can have income growth or aggressive growth. If you have an advisor or you’re using a discount brokerage firm, this is where a lot of the research and homework comes into play. You want to make sure that your allocation matches what you’re doing, how long you have and the level of risk that you’re willing to take.
 
So that is investing in a nutshell. This is a super quick explanation that can help you start to understand your choices. A lot of times I see people getting mixed up saying that they’re thinking that a Vanguard account is the same thing as an IRA. You can have an IRA at Vanguard full of mutual funds, cash, or anything else they offer, but you want to be thinking about it in three different layers.
 
  • Where is my money/who is it held with?
  • What type of account do I have and what is it doing for me?
  • How is the money in that account invested?

If you have any questions or you need anything, feel free to join my FREE Facebook group and post your questions in the discussion. Or book a FREE 15-minute call with me.

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