When you first start on your path to financial freedom, things may seem overwhelming. There seems to be so much to learn. That might be true, there is a lot to learn. But the good news is that non of it is very difficult. Everyone can learn how to be financially healthy! Today we are going to cover 6 different types of accounts.
1) Checking Account. A checking account is a bank account (opened at a bank) which allows you to write checks or other online banking practices. When choosing a checking account make sure to compare bank fees. Some banks will offer a checking account with zero fees if you meet certain qualifications such as a minimum balance, paycheck automatically deposited in account, certain number of transactions a year.
2). Savings Account. A savings account is also opened at a bank. It is an account that holds money you are not yet ready to spend. It’s purpose is to save money. You again should compare fees associated with this account. And see what kind of an interest rate you will earn on your savings. The interest rate will be quite low, this is a very safe place to keep your money. It is invested in cash and has a very low interest rate.
3). Retirement Account – 401k, 403b. Your employer may allow you to participate in a 401k account. You participate by opening a 401k account. This is a retirement account. They money grows grows tax free. What does that mean? It means that the money you put in this account goes in without paying any taxes. It then grows, tax free, until the day you take it out. You are not able to touch this money until you are 59.5 years old (or older). The thought is that you will be in retirement, living on a fixed income, and will be at a lower tax bracket when you take the money out. If you change companies you are able to transfer the account to a Traditional IRA where it will continue to grow. Often times employers will have ‘an employee match’ program. This is where the employer will match the amount that the employee puts in an account up to a certain percentage. This is free money and you should take advantage! The yearly limit for money you can add to a 401k is $20,500 in 2022 ($27,000 if you are over 50).
4). Retirement Account – Traditional IRA. IRA is short for Individual Retirement Account. There are two types of IRAs, Traditional and Roth. A Traditional IRA is similar to a 401k in that the money goes in pre-tax. You will be taxed when you take the money out (usually at a lower tax rate than when you were working). You are not able to take money out of your traditional IRA until you are 59.5 years old. There are limits to the amount you can add to a Traditional IRA each year. If you are under 50 years old you can add $6,000 in 2022 (if you are over 50 you can add $7,000 in 2022).
5). Retirement Account – ROTH IRA. A Roth IRA is a retirement account that is taxed on the way in. This means that you will pay taxes on this money at your current tax rate. This money will grow over time and is not able to be removed util you are 59.5 years old. When you take the money out, you will not be taxed again.
6). Brokerage Account. A brokerage account is similar to a bank account in that you can take money out whenever you what. But a brokerage account give you access to the stock market and other investing options. A brokerage account is considered a taxable account. There are many online brokerage firms that allow you to research and make trades.
Today we covered 6 types of investing accounts. Which one should you open? This is a great question and the answer is maybe all of them. You should have a checking account to handle your everyday money needs. You should have a savings account for an emergency fund. You should invest in your 401k. If you don’t have access to a 401k, you should invest in an IRA, and you should open a brokerage account to start investing (even if it’s only $50/month). I hope this helps clarify types of accounts a bit. Let’s get financially freedom!!!