It’s easy to let your cash sit in a high-yield checking account, but consider trying to invest your money to earn higher interest and ultimately generate passive income. Whether you’re using bank accounts, stocks and bonds, or other investment strategies, investment income can significantly boost your annual income. If you have a low tolerance for risk, follow these 10 tips to help you start investing carefully and get over your fear of investing.
1. Understand Your Risk Tolerance
First, you have to figure out your risk tolerance — which reflects how much of your investment money you’re comfortable losing if an investment failed — and your time frame for investing. The amount of risk you take should reflect both your investing goals and your age.
“Generally speaking, the longer your timeline, the more aggressive you can be when investing,” said Jennifer Barrett, chief education officer at Acorns and editor-in-chief of Grow. “If you’re in your 20s and investing for retirement, you’re likely putting a lot more money into stocks, which have more potential for growth over time but carry more risk, than into investment-grade bonds, which are less risky but generally offer lower returns.”
Typically, the lower the risk, the lower the annual rate of return. Look for low-risk investments if your risk tolerance is lower; but if it’s higher, consider more high-yield investments. No matter what your tolerance level is, diversify your portfolio to help mitigate your risk.
2. Open a Savings Account
Many people wouldn’t consider a savings account an investment, but it’s a great place to keep your rainy day fund — and until you have a rainy day fund, you shouldn’t be looking at riskier investments.
Savings accounts are covered by FDIC insurance, which means that if the bank goes out of business, the first $250,000 of your money is protected. In addition, you can access your savings account funds at any time in case of emergency.
3. Take Advantage of Deposit Accounts
If you have money you don’t need immediately but can’t afford to lose, consider a certificate of deposit or money market deposit account, both of which are covered by FDIC insurance. A CD will give you a higher interest rate than a savings account, but you must tie up that money for a designated period of time before you withdraw it or you’ll likely be charged a penalty. A money market account allows you to access your money at any time but often requires a higher minimum deposit than a regular savings account.
When you’re ready to start making larger investments through a broker, you can explore options to invest in brokered CDs. Brokered CDs can offer a higher yield than individual bank CDs, and you can invest in CDs at several financial institutions at a time.
4. Consider Corporate Bonds
Corporate bonds are fixed-income investments that consist of money you lend to a company for a variety of reasons, including expanding the business and paying for ongoing operations. Corporate bonds are typically viewed as “safer” investments because they offer a fixed interest rate, but if the lender goes out of business, you lose your investment. In addition, the resale value of a bond can increase or decrease as interest rates change.
5. Include Savings Bonds
Savings bonds are issued by the federal government, which makes them virtually risk-free. They often pay lower interest rates, however, because of their low risk factor. One benefit of this investment type is that you won’t have to pay state or local income taxes on the interest you earn on these bonds.
Find Out: How to Cash Savings Bonds
6. Think About Individual Stocks or Mutual Funds
If you have a higher risk tolerance and want to try the stock market, you could buy shares in companies you think will provide good returns. To diversify your investments, consider mutual funds instead. When you buy into a mutual fund, you’re investing in a number of companies at one time. Several index funds are set up to mirror the overall performance trends of the stock market.
7. Buy Real Estate
Investment real estate can provide good returns, but liquidity might be an issue — you can’t sell a house and get the cash immediately. In addition, it can be risky to put all your money into one property.
Consider investing in a real estate investment trust instead. You can use a REIT to buy into a real estate investment company so that your money is pooled with other investors.
8. Watch Out for Scams
Financial advisors who offer guaranteed high returns every year are generally scam artists. Advisors are regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority. By researching an advisor’s history, you can make sure he’s registered and check to see if he has been cited for any misconduct.
9. Work With Advisors Held to the Fiduciary Standard
Financial advisors are held to either the suitability or the fiduciary standard. Make sure you find an advisor who is held to the fiduciary standard.
The suitability standard enables an advisor to recommend any product that is “suitable” for you, which is a very broad standard. The fiduciary standard states that your advisor must always act in your best interests and avoid conflicts of interest.
10. Know What Fees You’ll Pay
Banks, brokerages and mutual funds can charge fees that can eat away at your investment income. Advisors are typically paid based on how much in assets they manage or on a commission from the investments and trades you make. Figure out all the fees you’ll be responsible for before you sign on the dotted line.
Keep Reading: 9 Safe Stocks for First-Time Investors