Do you have that nagging feeling that you should be doing more with your savings? Have people in your life told you to start your retirement planning in your 20s, but you don’t even know where to start?

If your day-to-day expenses are covered and you have an emergency fund, investing some of your hard-earned money for the future is highly recommended. But with the several ways you can invest, it can be hard to know what your best investment strategy is. Don’t worry, we’ll break it down to the basics for you.

Why Invest?

Your savings account is a great place for your emergency fund and short-term goals. It’s accessible, it’s protected, and it earns more interest than your checking account. But for longer-term goals, such as retirement, there are actually better ways to grow your funds.

Investment accounts allow you to earn more than you would in a regular savings account. Different types of investment accounts carry different amounts of risk and returns.

In this case, “risk” refers to the chance that you’ll lose some or all of your original investment. However, you shouldn’t always opt for low-risk investments: higher risk investments usually have the potential for higher returns.

If you’ve ever heard someone mention “diversifying your portfolio,” they’re referring to selecting a few different types of investments. Some of these investments should be a higher risk but greater reward, while some should be more conservative and stable, so your assets have some protection from the rise and fall of the market.

Your exact ratio of riskier versus safer investments will be unique to you. If you’re a younger investor, then the best investment strategy for a beginner like you might include more risk. This is because the younger you are, the more time you have to earn back any investment losses. However, your strategy all depends on your wants, needs and risk tolerance.

Types of Investment Accounts

When you’re ready to start investing money, there are several common investment accounts you’ll come across. The exact details may vary, but they’ll largely be sorted into one of these types of accounts.

Share Certificate

A Share Certificate is a low-risk investment often provided directly by your financial institution. Share Certificates work by offering a fixed interest rate and require you to “lock down” your money for a set amount of time (called the term) – typically, the longer the term, the higher the interest rate.

Having a fixed rate means your money earns guaranteed dividends over time. Plus, certificate rates aren’t affected by changes in the market for the duration of the term. Since certificates have a set term, however, if you make a withdrawal before the maturity date, you’ll likely pay a penalty.

Many certificates offer rollover options, allowing your money and any earned dividends to automatically get put into a new certificate.

Individual Retirement Account

There are two categories of retirement investment accounts: Individual Retirement Accounts (IRAs), which are available to and opened by individuals, and 401(k) accounts, which are offered to workers through employers. You can have an IRA even if you also have a 401(k) with an employer.

IRAs have income tax advantages and come in two base forms: Traditional and Roth IRAs. Their ultimate function is the same, but there are a few key differences.

Traditional IRA

• Possible income tax deduction the year your contribution is made.
• Income taxes are paid when you withdraw your funds.
• Must start taking withdrawals at age 73.

Roth IRA

• No immediate tax breaks.
• Pay taxes up front but avoid taxes when you withdraw your funds.
• No age-related withdrawal requirements.

IRAs have yearly contribution limits, which are adjusted from year to year. This means you can only add up to this limit to all your traditional and Roth IRAs combined. You can make contributions for a year up until the tax deadline for that year. For example, you have until April 15, 2025, to meet your contribution limit for 2024.

There is a third option, called the Coverdell Educational Savings Account (ESA), that is related to IRAs. An ESA, however, is opened for a beneficiary younger than 18 and can be contributed to by anyone. It functions very similarly to an IRA, but the savings must be used for educational expenses for the child. Learn more about ESAs here.

401(k)

IRAs vs. 401(k)s: What’s the difference? Your 401(k) operates similarly to an IRA, but it’s attached to your employer. You have the opportunity to put a portion of your pre-tax paycheck into your 401(k) automatically, making it an easy way to regularly save for retirement.

Many employers also have a matching policy, where they match your 401(k) contributions up to a certain percentage. We strongly recommend committing at least this percentage from your paycheck. For example, if your employer has a 4% matching policy, you should sign up and pledge at least 4% of your paycheck. That means an equivalent to 8% of your paycheck is being contributed to your 401(k). The matching 4% is basically free money!

If you leave a job, you can roll over your old 401(k) into an IRA that you control. Alternatively, you can roll your old 401(k) into one with your new employer.

Investment (Brokerage) Accounts

Have you ever heard someone mention that they invest in stocks? There’s a good chance they use a brokerage account. This type of account allows you to buy and sell stocks, bonds and mutual funds.

Brokerage accounts are much riskier than other types of accounts – they are not FDIC or NCUA insured, which means there’s no protection from loss. If the stock market crashes, the value of your account will likely go down until the market recovers. However, with greater risk comes greater reward.

These accounts are also taxed differently. Every time you sell an investment for a gain (in other words, make a withdrawal) you have to pay capital gains taxes. They also don’t offer the tax advantages that IRAs do. However, there are no limits on when and how much you can contribute to or withdraw from a brokerage account.

You can typically open one of these accounts at an independent firm that specializes in brokerage accounts. The firm will help you with your investment management and help you keep track of your accounts’ performance.

How to Choose the Best Option for You

Everyone’s investment portfolio is going to look a little bit different, because everyone has different savings goals and risk tolerance. Meeting with a professional financial planner, such as through our Financial Planning Services, is a good way to determine your investment plan. But before you start investing, answer these questions for yourself:

• What is the purpose of your savings? Are you saving for retirement, your child’s education or a down payment on a house?
• What are the current interest rates? You may be able to get a higher rate if you’re willing to accept more restrictions or more risk.
• What are the costs? When will you be taxed on your investment? Are there any penalties for withdrawals before a certain date?
• When will you need the money? Different accounts allow different amounts of liquidity (or immediate access to your money). Investments for longer-term goals can often afford to be locked down for higher gains.
• How is your risk tolerance? Remember that you can lose money with an investment account, but the risk may be worthwhile to earn a higher rate of return.

If you’re ready to get started, we are proud to offer a variety of IRA and Share Certificate options. We’re ready to help you get on track for your savings goals!