Friday, April 27, 2012

How to Get Rich - Convert Savings to Income (Part One)

Hopefully you have been following my advice and started saving at least ten percent of your income and placing it into your savings account.

Once you have saved enough to cover your emergency reserve (at least three months of your current living expenses) plus an additional one thousand dollars, it is now time to look for ways to convert these extra savings into an income source.

The simplest way to start would be to open yourself an online brokerage account with a local bank or other financial institution. I would recommend opening a cash account and not a margin account at this time. Borrowing on margin is something I will discuss in a later post as this can be risky and should be used only once you gain more experience.

Shopping for a Broker

Look for an online brokerage that will give you additional services such as research and investment screening capabilities. I personally use TD Waterhouse here in Canada. Make sure to check out all of your options before making a choice paying particular attention to fees and commissions. There can be a wide range of costs involved.

Your account will be very small at first and you need to find the best alternative for clients with small accounts.

Where To Start

The very first investment I would make in this new account would be to a Money Market Fund.  These are funds that do not fluctuate in value and should have no fees for buying and selling shares. They will pay a small amount of interest income and should be used mainly for parking your new deposits (and later on dividend income) until a good longer term investment is ready to buy.

This Money Market Fund will become your accumulator account within your online brokerage account.
Deposit your first one thousand dollars into your brokerage account and then into your new Money Market Fund account. All of your future savings should be deposited in this manner as well.

Learn While You Earn

You will now be earning a small amount of interest income each month from your Money Market Fund. I recommend accumulating at least five thousand dollars in this fund before you attempt to even look at the higher income investments.

While you are waiting for this amount to accumulate, take the time to learn how to use the research and investment screen sections of your new on line brokerage account. This way you will be able to build a list of interesting investment choices and to do proper research on them before making your initial long term investment.

This is the first step towards turning your savings into a long term investment income stream and the first building block for your secure financial future. Stay tuned for part two in a future post.

As always, I look forward to your comments and suggestions for future topics.

1 comment:

High Interest Savings Account said...

Investing money will earn you more money. In a normal situation, what goes in should be higher than what goes out. The money in between is what you now call as your savings.