How do I Invest Money in the Bank?

1. Your style 

How much time do you want to put into investing your money?

The investing world has two major camps when it comes to the ways to invest money: active investing and passive investing. We believe both styles have merit, as long as you focus on the long term and aren't just looking for short-term gains. But your lifestyle, budget, risk tolerance, and interests might give you a preference for one type.

Active investing means taking time to research investments yourself and constructing and maintaining your portfolio on your own. If you plan to buy and sell individual stocks through an online broker, you're planning to be an active investor. To successfully be an active investor, you'll need three things:

  • Time: Active investing requires lots of homework. You'll need to research investment opportunities, conduct some basic analysis, and keep up with your investments after you buy them.
  • Knowledge: All the time in the world won't help if you don't know how to analyze investments and properly research stocks. You should at least be familiar with some of the basics of how to analyze stocks before you invest in them.
  • Desire: Many people simply don't want to spend hours on their investments. And since passive investments have historically produced strong returns, there's absolutely nothing wrong with this approach. Active investing certainly has the potential for superior returns, but you have to want to spend the time to get it right.

On the other hand, passive investing is the equivalent of putting an airplane on autopilot versus flying it manually. You'll still get good results over the long run, and the effort required is far less. In a nutshell, passive investing involves putting your money to work in investment vehicles where someone else is doing the hard work — mutual fund investing is an example of this strategy. Or you could use a hybrid approach. For example, you could hire a financial or investment advisor — or use a robo-advisor to construct and implement an investment strategy on your behalf.

2. High-Yield Savings Accounts

High-yield savings accounts are a type of savings account, complete with FDIC protection, which earn a higher interest rate than a standard savings account. The reason that it earns more money is that it usually requires a larger initial deposit, and access to the account is limited. Many banks offer this type of account to valued customers who already have other accounts with the bank.

Online high-yield bank accounts are available, but you will need to set up transfers from another bank to deposit or withdraw funds from the online bank. It’s worth learning how to find and open these accounts. And make sure to shop around for the best high-yield savings account rates to ensure you’re maximizing your savings.

The maximum insurable amount in an FDIC-insured bank account is $250,000 per depositor, per bank.

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CD

One of the most popular choices for investing in the bank, a certificate of deposit (CD) is basically a closed savings account. You put money in, and you cannot access it (without a penalty) for a certain amount of time. There are 5-year and 10-year cds, and the interest rate on a CD is significantly higher than it would be on a regular savings account. At the end of the term for the CD, you can either withdraw your money or re-invest it.

5. Money Market Deposit Accounts

Money market deposit accounts are offered by banks and typically require a minimum initial deposit and balance, with a limited number of monthly transactions. Unlike money market funds, money market deposit accounts are FDIC-insured. Penalties may be assessed if the required minimum balance is not maintained, or if the maximum number of monthly transactions is surpassed. The accounts typically offer lower interest rates than certificates of deposit do, but the cash is more accessible. 

Step 5

Discuss any additional investment options with an account representative at your bank. Ask for full disclosure of any fees and expenses, as well as any commissions involved in the sale. If you are interested in mutual funds, you might be able to find less-costly investment options by working directly with a low-cost no-load mutua- fund company.

IRA

An Individual Retirement Account (IRA) is a way to save money and avoid taxes while investing. You can set up an IRA account through your bank. Most offer a choice of various mutual funds, stocks and bonds as the means of saving.

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Investing money for beginners

The list of investment avenues described above is relatively exhaustive. However, all of these may not be suitable for those new to investing. Investing money for beginners is tricky if you are not conversant with the nuances of investment avenues. It might make sense to limit your investments to insurance-linked financial instruments, mutual funds and fixed deposits, PPF and small savings accounts.

The Foolish bottom line

Investing money may seem intimidating, especially if you’ve never done it before. However, if you figure out 1. how you want to invest, 2. how much money you should invest, and 3. your risk tolerance, you'll be well positioned to make smart decisions with your money that will serve you well for decades to come.

Should you invest now or wait?

You may want to consider starting your investment strategy after you’ve:

  • Built your emergency savings. Savings should come first. Before investing, try to make sure you have a separate low-risk, low-return account you can use to cover expenses during an unforeseen event — typically at least three to six months worth of living expenses.
  • Paid off high-interest debt. By paying off high-interest debt in full, you’ll reduce the total amount you owe faster and free up money to put toward savings or investing.
  • Maxed out your 401(k) and IRA. If your long-term goals include a comfortable retirement and you’re already contributing the maximum amount to your retirement accounts, it may be an appropriate time to explore additional investment types.

What to consider

As you’re deciding what to invest in, you’ll want to consider several factors, including your risk tolerance, time horizon, your knowledge of investing, your financial situation and how much you can invest.

If you’re looking to grow wealth, you can opt for lower-risk investments that pay a modest return, or you can take on more risk and aim for a higher return. There’s typically a trade-off in investing between risk and return. Or you can take a balanced approach, having absolutely safe money investments while still giving yourself the opportunity for long-term growth.

The best investments for 2022 allow you to do both, with varying levels of risk and return.

Risk tolerance

Risk tolerance means how much you can withstand when it comes to fluctuations in the value of your investments. Are you willing to take big risks to potentially get big returns? Or do you need a more conservative portfolio? Risk tolerance can be psychological as well as simply what your personal financial situation requires.

Conservative investors or those nearing retirement may be more comfortable allocating a larger percentage of their portfolios to less-risky investments. These are also great for people saving for both short- and intermediate-term goals. If the market becomes volatile, investments in CDs and other FDIC-protected accounts won’t lose value and will be there when you need them.

Those with stronger stomachs, workers still accumulating a retirement nest egg and those with a decade or more until they need the money are likely to fare better with riskier portfolios, as long as they diversify. A longer time horizon allows you to ride out the volatility of stocks and take advantage of their potentially higher return, for example.

Time horizon

Time horizon simply means when you need the money. Do you need the money tomorrow or in 30 years? Are you saving for a house down payment in three years or are you looking to use your money in retirement? Time horizon determines what kinds of investments are more appropriate.

If you have a shorter time horizon, you need the money to be in the account at a specific point in time and not tied up. And that means you need safer investments such as savings accounts, CDs or maybe bonds. These fluctuate less and are generally safer.

If you have a longer time horizon, you can afford to take some risks with higher-return but more volatile investments. Your time horizon allows you to ride out the ups and downs of the market, hopefully on the way to greater long-term returns. With a longer time horizon, you can invest in stocks and stock funds and then be able to hold them for at least three to five years.

It’s important that your investments are calibrated to your time horizon. You don’t want to put next month’s rent money in the stock market and hope it’s there when you need it.

Your knowledge

Your knowledge of investing plays a key role in what you’re investing in. Investments such as savings accounts and CDs require little knowledge, especially since your account is protected by the FDIC. But market-based products such as stocks and bonds require more knowledge.

If you want to invest in assets that require more knowledge, you’ll have to develop your understanding of them. For example, if you want to invest in individual stocks, you need a great deal of knowledge about the company, the industry, the products, the competitive landscape, the company’s finances and much more. Many people don’t have the time to invest in this process.

However, there are ways to take advantage of the market even if you have less knowledge. One of the best is an index fund, which includes a collection of stocks. If any single stock performs poorly, it’s likely not going to affect the index much. In effect, you’re investing in the performance of dozens, if not hundreds, of stocks, which is more a wager on the market’s overall performance.

So you’ll want to understand the limits of your knowledge as you think about investments.

How much you can invest

How much can you bring to an investment? The more money you can invest, the more likely it’s going to be worthwhile to investigate higher-risk, higher-return investments.

If you can bring more money, it can be worthwhile to make the time investment required to understand a specific stock or industry, because the potential rewards are so much greater than with bank products such as CDs.

Otherwise, it may not simply be worth your time. So, you may stick with bank products or turn to ETFs or mutual funds that require less time investment. These products can also work well for those who want to add to the account incrementally, as 401(k) participants do.

Recap of the 11 best investments in 2022

  1. High-yield savings accounts
  2. Short-term certificates of deposit
  3. Short-term government bond funds
  4. Series I bonds
  5. Short-term corporate bond funds
  6. S&P 500 index funds
  7. Dividend stock funds
  8. Value stock funds
  9. Nasdaq-100 index funds
  10. Rental housing
  11. Cryptocurrency

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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