Before learning about the accounts you want, make sure you have all the Accounts You Need Now and the Accounts You Need Next described in the first two parts of the Phippen Tax & Financial Services Financial Accounts Series. If you already have the accounts in parts one and two, you already organized your finances to provide yourself emergency contingencies, tax-advantaged retirement plans, and targeted money for happiness. The accounts in part three establish credit and diversify your portfolio for larger investment goals:
1. No-Fee Credit Card
A no-fee credit card is your path to establishing a good credit score and facilitating future investment opportunities. Modern society relies on credit to make quick judgements of individuals, for better or worse. A weird quirk in the current credit system is that your credit score cannot improve if you do not use credit. In other words, if you have never had any debt, your credit score will be low. While completely illogical, that is how credit works.
If you have had debt, you can establish a good credit score through consistent on-time payments. If you do not, this credit card may be more of a necessity so you can start establishing credit. Regardless of your prior experience with debt, a no-fee credit card can help. By establishing a history of on-time full payments, you will gradually raise your credit score. A great credit score helps you on home rental applications, future credit card applications, insurance, purchasing a home, and making other large investments.
Why do I want a no-fee credit card? A no-fee credit card allows you to improve your credit without paying an annual credit card fee. Improving your credit score affects your future rental, home ownership, and investment opportunities. Additionally, some types of transactions (for instance, renting a car or hotel room) require credit cards or involve increased costs and risks if you use a debit card or cash.
2. Personal Brokerage Account
Brokerage accounts allow you to invest as much money as you want, beyond the limits of your tax-advantaged retirement accounts. These are not tax-advantaged, per se, but the tax rates for withdrawing growth on investments are lower than tax rates for regular income. That means any income you enjoy from investment growth (called “capital gains”) is taxed at a lower rate than the money you earn from your job, if you have held the investment for more than a year
If you plan to retire early, opening a brokerage account is a must since it provides the money you need to live off of in retirement before you hit age 59.5. Outside of early retirement, there are a number of reasons to open a brokerage account ranging from enjoying a wealthy retirement to investing for long-term purchases (think, beach home you want in 20 years).
Why do I want a personal brokerage account? Bolster your retirement or other long-term investments, particularly if you plan to retire early, to solidify your financial future. Brokerage accounts allow you to invest for maximum growth, and you can enjoy the returns from that growth at a lower tax rate than when you work for money.
3. Certificate of Deposit
Certificates of deposit (CDs) are similar to high-yield savings accounts, but the investor commits to locking their money in the account for a specific time period in order to receive a higher interest rate. This time frame can be anywhere from a month to multiple years. The longer you lock your money into a CD, the higher the interest rate you will receive.
CDs are different from bonds because they are insured by the Federal Deposit Insurance Corp. (FDIC) for CDs up to $250,000. This makes CDs a safer investment than bonds, which are money loaned to governments or businesses, but CDs also receive a lower interest rate compared to bonds. While they do not receive as high of an interest rate, CDs strike the unique balance of safely obtaining a higher interest rate than a HYSA, avoiding the risks of bonds, and locking funds for shorter time periods than bonds.
Why do I want a certificate deposit? CDs are a safe place to invest money for reliable returns, particularly if you are waiting until a specific future date to make a large purchase. Goals like acquiring an investment property are ideal for a CD. If you do not need the money immediately but do not want to save it for regular retirement age, CDs provide a mid-term option. In short, CDs are a great place to set aside money for mid-term goals where you need guaranteed returns.
The no-fee credit card, personal brokerage account, and certificate of deposit are important tools in your financial repertoire and will help you along your path to achieving your financial goals.
About the Financial Accounts Series: The Financial Accounts Series is a four-part series discussing financial accounts that can improve the health of your finances. Over the next three weeks, the Phippen Tax & Financial Services team will provide a deep dive on each of the accounts listed above before releasing Part 4, “Accounts to Have for Fun.” If you would like to seek additional guidance about your personal finances or the specific organization and composition of your financial accounts, please contact Patrick Phippen or complete a new client form if you have not worked with Patrick in the past.
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