Are you interested in investing? Before you decide what to invest in, think about your financial goals. For example, if you have a goal of buying a house at the end of the year, choose an investment that would allow you to grow your money and do not penalize you for early withdraws or force you into long term commitments. Your age impacts how much you can invest, what to invest in, and how much will you allocate to each investment. Never invest money you may need soon, and save enough cash for emergency expenses before you begin to invest.
By investing your money in a variety of assets, you can protect your hard-earned money from potential financial risks due to a single investment (“putting all eggs in one basket.”) Below are some of the most common financial options to increase your wealth.
Individual Retirement Accounts (IRAs)
Individual Retirement Accounts allows you to save for retirement while legally deferring taxes until you are 59 ½ years old. Brokerage firms and banks manage IRAs and collect money to invest in stocks, mutual funds, certificate of deposit and other financial securities.
Roth IRAs help your financial contributions grow and withdraw tax free, but your contributions are not tax deductible. For Traditional IRAs, withdrawals are taxed as ordinary income and contributions can be tax deductible. Investors are penalized, if they decide to take money out before their IRAs account mature, so make sure you know your financial goals before choosing the IRAs you’d like to invest in.
401k is a retirement savings account that allows you to contribute up to $17,000 a year. The savings account invests in mutual funds that are made of stocks or money market mutual funds that may have securities like a certificate of deposit. You can choose to invest money that has already been taxed or decide to invest pre-taxed money into a 401k plan, so it’s taxed when you withdraw it.
If your employer has a matching contribution 401k plan, take advantage of it! This arrangement can allow your investment to grow faster than if you were financing it on your own since your company matches the amount you invest in the plan. If you decide to take out money from your 401k plan before you turn 59 1/2 years old, you will pay penalty fees.
Companies and government entities issue bonds or loans as a way to raise money. Investors can purchase bonds to receive a fixed interest rate payment along with their original investment amount. Bonds have maturity dates that can range from ninety days to many years. The federal government, local authorities, and public corporations can issue bonds to investors. The interest rate from bonds depends on its duration and the issuer’s credit.
Certificate of Deposit (CDs)
Certificate of Deposit is a saving certificate issued by a bank. During the duration of the CDs’ term, you are not allowed to withdraw the money depending on the financial firms. At the end of the term, you can collect the amount you invested and the interest earned based on its annual percentage yield. CDs are available for purchase based on an initial investment (normally starting at $1,000) from banking institutions and are federally insured. CDs can have a term length of one month to five years.
Dividend is a form of payment for investors who own stocks and other investments. Corporate stocks, certificate of deposit, and mutual funds are examples of assets that give dividends to their owners. Dividends are normally paid out once a year due to the company achieving their profit goals and their increasing stock value. Dividends are a great way for you to get a portion of a company’s earnings.
Mutual funds are a convenient way to invest in multiple companies for significantly less than if they have purchased shares of different companies individually. There are many types of mutual funds available for investors to buy, ranging from index to sector funds. Index mutual funds allow you to buy shares of stock in an index (like the S&P 500) while sector mutual funds are a collection of companies in a certain sector.
How can you evaluate whether a mutual fund is a good investment or not? Examine the mutual fund’s performance against the S&P 500, and find out if it has a low expense ratio. If the fund doesn’t charge sales commissions for buying or selling the fund and has a low turnover, you should strongly consider adding it to your investment portfolio.