The Largest Investment: Consumers' Biggest Financial Commitment

The largest investment most consumers will make is buying a house. For this reason, it is important to understand the pros and cons of different investment options and how they fit into your overall financial plan. While it may seem daunting at first, many investors manage their own assets. The first step to investing is opening a brokerage account.

High-yield savings accounts

One of the benefits of high-yield savings accounts is that they combine the flexibility of regular deposits and withdrawals with higher interest rates. This means you can access your money whenever you need it while still earning a competitive rate on your savings. Additionally, many of these accounts have no minimum balance requirements, no monthly fees, and can be opened and managed online, making them a convenient and accessible option.

When choosing a high-yield savings account, it's important to consider factors such as interest rates, monthly fees, minimum balance requirements, and the reputation of the financial institution. It's also worth noting that, while high-yield savings accounts offer higher interest rates, there is still a risk of losing purchasing power over time due to inflation if the interest rates are too low.

• SoFi Checking and Savings: This account offers a competitive APY of 3.80% and has no minimum balance requirement. It combines checking and savings features, allowing you to earn interest on both portions of the account.
• Discover® Online Savings: Discover Bank's high-yield savings account has a strong APY and an easy-to-navigate website. It also offers 24/7 customer support and a mobile app with high ratings.
• American Express® High Yield Savings Account: This account offers a competitive yield, no monthly fees, and no minimum balance requirement to open the account or to start earning interest.
• CIT Bank Platinum Savings: CIT Bank's high-yield savings account offers an APY of 4.35% on balances of $5,000 or more. However, if your balance dips below this amount, the APY decreases significantly.
• Capital One 360 Performance Savings™: This savings account has no minimum deposit requirements or monthly fees, and it earns the same rate on all balances. Capital One also offers a checking account that earns interest and has no monthly fees.
• UFB Portfolio Savings: UFB Direct's high-yield savings account has no monthly maintenance fee and no minimum deposit requirement. It offers a competitive APY of 4.01% on all balances.

By choosing a high-yield savings account, you can maximize your savings and watch your money grow faster, all while maintaining easy access to your funds.

Certificates of deposit

CDs are best for individuals looking for a guaranteed rate of return that is typically higher than a savings account. In exchange for a higher rate, funds are tied up for a set period, and early withdrawal penalties may apply.

CD rates are fixed, so even if national interest rates change, the rate you locked in upon opening your CD account will not change. Like a traditional savings account, the interest earned on a CD account is compounded, meaning you earn interest based on your deposit balance, including interest earned. CD interest can be compounded daily, monthly, annually, or at maturity, depending on the type of CD you have. You can usually choose when and how you receive your CD interest payments.

When considering a CD, it's important to note that there is a penalty for withdrawing money from your CD before it reaches maturity. The early withdrawal penalty depends on the type of CD you have and the point in your term when the early withdrawal is made.

Government bonds

The price of a government bond will fluctuate in the market. Bond prices have an inverse relationship with interest rates—when interest rates go up, government bond prices go down in the secondary market. The secondary market for U.S. government bonds is very liquid, allowing holders to resell them easily.

There are several types of government bonds, including municipal bonds, U.S. savings bonds, treasury bills, treasury notes, and treasury bonds. Municipal bonds are issued by local governments to fund infrastructure, libraries, or parks, while treasury bonds are long-term bonds with a maturity of 20 to 30 years.

Corporate bonds

• Regular cash payments: Bonds provide regular interest payments, which is not always the case with stocks. This offers a high level of certainty and income for investors.
• Lower volatility: Bond prices tend to fluctuate less than stocks, making them a more stable investment option.
• Lower risk: Bonds are generally considered less risky than stocks. For a successful bond investment, the company only needs to survive and pay its debts, whereas stocks require the company to thrive and increase in value.
• Higher yields than government bonds: Corporate bonds often offer higher interest rates than equivalently rated government bonds.
• Access to a secondary market: Investors can buy and sell bonds in the bond market, providing liquidity to their holdings, which is not available with bank CDs.

However, there are also some drawbacks to investing in corporate bonds:

• Fixed or floating payments: Bond interest rates are typically fixed or floating, and investors will only receive the agreed-upon payments. This is in contrast to dividend stocks, which can increase their payouts over time.
• Riskier than government debt: Corporate bonds are generally riskier than government bonds, as governments can raise taxes or issue currency to repay debts.
• Low capital appreciation: Bonds have a low potential for capital appreciation. Investors can expect to earn the yield to maturity, while stocks can continue to rise and earn much more over time.
• Price fluctuations: Bond prices can fluctuate, unlike CDs, so investors may not get their full investment back if they need to sell before maturity.
• Lack of insurance: Bonds are not insured, unlike CDs, so there is a risk of losing principal if the company defaults on the bond.
• Credit analysis required: Investing in individual bonds requires analysing the company's ability to repay, which can be time-consuming.
• Vulnerable to rising interest rates: Bond prices tend to fall when interest rates rise, and investors may not benefit from higher payouts to compensate.

Despite these risks, the corporate bond market remains popular among investors. It's important to carefully consider the advantages and disadvantages before investing in corporate bonds and to diversify investments to minimise risk.

Money market funds

• Have an investment goal with a short time horizon
• Have a low tolerance for volatility
• Are looking to diversify with a more conservative investment
• Need the investment to be extremely liquid

There are three main types of money market funds, categorised by the focus of the fund:

• Government: At least 99.5% of the fund's total assets are invested in cash and US Treasury securities.
• Prime: Assets are invested in any eligible US dollar-denominated money market instruments, including commercial paper, certificates of deposit, corporate notes, and other private instruments from domestic and foreign issuers.
• Municipal: At least 80% of the fund's assets are invested in municipal securities whose interest is exempt from federal income tax.

Frequently asked questions