After we took a trip back to high school using binders as an analogy for investing, I thought it might be helpful to share a real world example of how one person (me!) actually uses investment accounts. I’m not saying I do this right, just offering what works for me. Feel free to take it or leave it.
My three investment accounts
I currently have three investment accounts:
- MA Smart Plan. This is my employer-sponsored 457 retirement account. A 457 is like a 401(k) but for government employees. I contribute to this account using pre-tax dollars which are automatically deducted from my paycheck each week. Unfortunately, this account has limited investment options, so this money is all invested in a target date retirement fund.
- Roth IRA with Charles Schwab. This is also a retirement account. There is a contribution limit for Roth IRAs (this year it is $5,500), so each year I try to invest up to that limit. I am able to transfer money to this account electronically by linking my Schwab account with my checking account. Once the money is transferred to the Roth IRA, I can then buy stocks, bonds and many other types of investments.
- Individual brokerage account with Charles Schwab. This is my only non-retirement investment account. Unlike the Roth IRA, I can pour as much money in here as I want each year. The process for investing is the same as for the Roth IRA: simply transfer funds in from my linked bank account then choose what to buy
To go back to my previous analogy, you can see that have three “binders.” Two happen to be retirement accounts and one is not. Two happen to be with Charles Schwab and one is not. Within each binder, I have a variety of folders. I’ll share my asset allocation in the future, but for today I’ll just let you know that I have mostly mutual funds and ETFs and try to diversify between large cap, small cap, international and bond funds.
How did I pick Charles Schwab?
You might be wondering how I wound up with two accounts at Charles Schwab. After all, there are tons of options for investment brokerages, from online institutions like E-Trade, to banks like Bank of America/Merrill Lynch, to mutual fund companies like Vanguard. You probably think that being the good personal finance blogger that I am I did tons of research to figure out which option offered the lowest fees, best customer service and most investing options.
Well, I’m about to admit a major personal finance fail. I have Schwab accounts for one reason and one reason only: my dad uses Schwab. When I started investing at the age of 22, there were so many questions I had that I just had to start making some decisions. So I decided that if Schwab has worked for my dad all these years, it will probably work for me too. And it has. I have no complaints about Schwab whatsoever. I also haven’t looked into any other options though, so I could just be missing out on something I’m unaware of. Perhaps this is fodder for a future post!
What types of investment accounts do you have?