When is an investment account the right choice?
When is an investment account the right choice? (0:59)
An investment account offers the prospect of a good return on your money relative to other options like a bank account. It’s also relatively liquid, which means if you need the money it’s relatively easy to access compared, for example, to money invested in your home or other property where there is time and hassle involved in selling.
So if you’re looking for a potentially attractive return and access to your money if you really need it, then an investment account may be a good choice. However, there is one important consideration and that’s how long you plan to invest your money for. The stock market is extremely unpredictable over days, weeks and months. However, history shows that over investment periods of several years, investors earn a positive return far more often than not, especially with well diversified investment. So if you think it’s pretty unlikely you’ll need the money you’re investing in the next 4 years, then an investment account could be a good option for you.
Other considerations when investing are debt and rainy day funds. Debt matters because borrowing money can be expensive. Often you pay more to borrow money, such as on a credit card, than you are likely to earn if you’re investing. This means if you have substantial consumer or credit card debt, then you will probably do better working to pay off that debt than investing straight away. If you have a mortgage with an interest rate in the low single digits, then investing may still make sense for you, provided you have enough income to more than meet your mortgage payment each month. Finally, a rainy day fund is also important. A rainy day fund covers emergency expenses like new tyres for the car or paying for a month of expenses if you lose your job and need time to find a new one. A rainy day fund is helpful because it means you don’t have to dip into your investments at the first hint of financial trouble.
So, to recap, an investment account is a good idea if you have money you won’t need for a few years, aren’t deep in credit card or other high interest debt and already have a rainy day fund equal to a few months of salary to cover unexpected, but fairly routine, expenses.