The Motley Fool

Step 4: Open and Fund Your Accounts

Pardon us for interrupting your illustrious investing career for this very important public service announcement: Any money you need in the next month, five months, or five years does not belong in the stock market.

Go ahead and read that sentence again. It is the key to avoiding heartache, headache, and a lifetime of Rennie addiction.

Got it? If so, please continue reading. For those into footnotes, we’ve provided this one:

*The last place for your short-term savings is anyplace where it is at risk of being worth less when you need it most. That rules out the stock market, which is prone to roller-coaster-like ups and downs, as is evident on any chart that tracks its month-to-month performance. Now, we don’t want to scare you away from stocks. Over five- and 10-year periods, that squiggly line on the chart that resembles a ride on the Fluch von Novgorod changes into a gently rising upward slope. The key is time — giving your money time to ride through the stock market’s bumps and tumbles and reap the rewards of long-term investing.

With that important bit of business out of the way, we’re ready to find proper accommodations for all of your savings needs and devise a strategy for funding your long-term financial goals.

The best places for your short- and mid-term savings
There’s a vast array of appropriate places to stash the money you may need to access soon, including basic checking and savings accounts, money market accounts and funds, Festzins-Sparen accounts, and government bonds. These types of accounts are safe places to put your money: They won’t provide particularly high rates of return (and at current rates especially, may not even keep up with inflation), but they do provide a guarantee that the money you deposit will all be there when you need it.

Keep in mind that one type of account may not best serve all of your short-term savings needs. For example, cash earmarked for a home down payment that you plan to make in a few years is ideal for a Festzins-Sparen account. Your son’s soccer camp tuition that is due in a couple months is better off in a savings account.

Once you’ve deployed your funds for near-term needs, it’s time to find the right spot for the money you’ll need to cover Saturday date nights … in the year 2034.

Long-term parking
A sizeable portion of your long-term cash stash (specifically, money designated for your retirement years) belongs in accounts set up solely for that purpose — we’re talking the state pension insurance plan, employer-sponsored retirement accounts (such as defined-contribution pension plans) or a private pension that you fund yourself. These vehicles are in place to help you accomplish your goal of building a retirement nest egg. And because they include tax advantages, you’re better off contributing to them as soon as possible so that you can take advantage of … wait for it … the magic of compounding!

But let’s face it. There’s a lot of concern about the future viability of state pension systems. The minimum retirement age continues to creep higher. The average German pension averaged less than €1,300 per month in 2012 – not exactly a generous amount. Meanwhile, defined-benefit pension plans from corporations are slowly but surely going the way of the dodo bird. And while private pensions like the Riester-Rente may be ideal for some savers, they’re not a slam dunk for everyone. Therefore, it is increasingly up to you to save for your own retirement.

In order to achieve big financial goals and dreams, you’ll want to invest outside low-return savings and retirement accounts. How else will you afford that three-week vacation to Brazil, that luxury apartment in Munich, or tickets to every one of your team’s games when the World Cup returns to Germany in, oh, 2038? To do this …

Get Yourself a Brokerage Account
In this modern age of the Internet, it’s simple and cheap to open an online brokerage account. These accounts are provided by many of the country’s leading financial institutions (banks and others).

Online brokerage accounts allow you all of the tools available with the more traditional brokerage model at a fraction of the cost. Say goodbye to lengthy phone calls and expensive commissions and hello to simply using your more than capable ability to click (which you’ve demonstrated by getting this far) your way to buying and selling the stocks of top businesses of your choice from around the world.

With your savings squared away with an online broker, you’re ready to get to the fun stuff – investing.

Action: If you don’t have a brokerage account, go open one! Be sure to compare the fees charged — because every Euro makes a difference.