4 Steps You Need to Take Before You Open Your First Investment Account

4 Steps You Need to Take Before You Open Your First Investment Account Opening your first investment account can get you one step closer to financial security. You might have a savings account for emergencies or short-term goals, but investing is key to growing wealth.When you invest your money in stocks, mutual funds or real estate you have the opportunity to earn higher returns than the annual percentage yield your bank might pay on a savings account or CD. And when you have a longer time frame for investing, you have more of an opportunity to take advantage of the power of compounding interest.Heres what you need to do before start investing and building your portfolio.1. Outline your goals.Before opening your first investment account, ask yourself what do you hope to accomplish? You may have short-term goals, such as investing a set amount of money each month consistently. And then you may have long-term goals, like socking away enough money to retire early or banking a couple of mio by your 60s. Get clear on what your overall goals are. Then, break each of those goals down into smaller, actionable steps. This gives you a plan to follow as you invest.2. Gauge your risk toleranceRisk tolerance is another way of saying how much risk youre comfortable taking with your money when you invest. Everyones risk tolerance is different generally, investing experts agree that the younger you are, the more risk you can afford to take on. The reasoning goes that if the market dips and you lose money in your 20s or 30s, your portfolio has plenty of time to recover if youre not planning to retire for a few decades.Different factors can affect your risk tolerance, including your age, how long you have until you retire, how much money you have to invest and your goals. If youre not sure how much risk youre okay taking, completing a risk tolerance questionnaire can help you figure it out. Brokerage accounts which are financial companies that offer investment accounts ofte n have risk tolerance questionnaires you can fill out online. Its a good way to get a starting point for deciding what to invest in.3. Research your account optionsInvestment accounts arent one-size-fits-all and its helpful to know what type of account you want to open. For example, you might open aTraditional Individual Retirement Account (IRA)Roth IRAIRA for self-employed individualsTaxable brokerage accountSo whats the difference?The first three investment accounts on the list are specifically designed for retirement. A traditional IRA allows you to deduct your contributions from your taxable income. Your money grows tax-free and when you make withdrawals in retirement, your investment earnings are taxed at your regular income tax rate. IRAs for self-employed workers follow the same rules.A Roth IRA is different. These accounts dont offer a tax deduction but you get something else tax-free withdrawals in retirement.With IRAs, you get tax breaks but youre limited on how much you c an invest in them. As of 2019, the annual contribution limit is $6,000. (Unless youre 50 or older then you get another $1,000 added to the limit.)A taxable brokerage account, on the other hand, has no cap on contributions. You can invest as little or as much as you like.The downside? You dont get any tax breaks. And youll pay capital gains tax on earnings if you sell an investment.But a taxable account may be the way to go if youre able to invest more than $6,000 a year. Even better, you could open an IRA anda taxable account to super-charge your savings.4. Compare brokerages to find the right fitOnce youve assessed your goals and risk tolerance and decided which type of investment account to open, the last step is choosing a brokerage. Heres where you have to dig in and do some research.Specifically, you want to look at theRange of investments a brokerage offersManagement fees for individual investmentsFees the brokerage chargesMinimum amount to open an accountThe range of investme nts offered is important for diversification. Diversification means having a mix of different types of assets in your portfolio. This is a smart strategy for managing risk.Every brokerage is different in terms of what they offer. Brokerage A, for example, might focus exclusively on exchange-traded funds or ETFs, which are mutual funds that trade on an exchange like a stock. Brokerage B, on the other hand, might offer ETFs but also add mutual funds, bonds or bond funds and individual stocks into the mix.While youre looking at the choices for investing, look closely at the fees youll pay. With mutual funds or ETFs, for example, focus on the expense ratio, which is expressed as a percentage. This number tells you the annual cost of owning the fund.Stocks dont have an expense ratio, but the brokerage may charge you a trading fee to buy and sell them. Brokerages can also charge other management or administrative fees. Any fee eats into your returns so be sure you get a full rundown of th e costs before opening your investment account.Look at the minimum required to open your first account as well. There are some brokerages that let you start investing in a taxable account with as little as $1, while others might require $1,000 or $2,000 to open an IRA. Make sure the one you choose fits your budget for investing.And finally, consider how easy it is to add to your investment account. drumherum up automatic transfers from your checking account, for instance, is an easy way to level up your wealth-growing efforts.