Before you invest, save up enough money in your emergency fund (at least three months salary) so that in case you run into a financial hardship, you don’t have to dip into your investments for help.
You want the money you are investing to be FOR INVESTING.
Next,
Decide whether to invest in a retirement account, which can lower your earned income and your taxes at the end of the year
OR,
if you plan to invest in a standard non-retirement brokerage account. If using a non-retirement account, make sure you are aware of the tax ramifications if you need to sell any of your investments.
KEY POINTS
*If you contribute to a 401K, you will be taxed if you withdraw money early, but it can lower your taxable income for the year. Many companies will also match your contribution up to a limit.
*If you contribute to a traditional IRA, it can also lower your taxable income for the year. There are also tax ramifications if you withdraw money early. Any capital gains will be taxed when you start withdrawing money, usually after age 59 and 1/2. Some exceptions apply.
*If you have a Roth IRA, your capital gains will not be taxed when you withdraw money after age 59 and 1/2. Some exceptions allow for early withdrawals.
*If you hold an investment in a non-retirement account for one year or longer, the tax rate on capital gains is 15%. (Long Term Capital Gains)
*If you hold an investment in a non-retirement account for less than a year, your capital gains will be taxed at your tax rate which is based on your adjusted gross income (Short Term Capital Gains)
So now that you have decided what your investment vehicle will be (retirement or non-retirement)…Make the decision whether or not you are going to use a Financial Advisor or if you plan to DIY (Do-It-Yourself).
Why pay for a Financial Advisor?
-Many people think they have access to all the same information as the Financial Advisors (FA’s). That is simply not the case. FA’s generally have an entire team of Certified Financial Analysts and Mutual Fund Representatives who are tracking all the analytics of particular businesses and the market as a whole. This information puts the Financial Advisor at a sizable advantage over an average investor. These analysts are visiting the companies and talking to the executives. They talk to the competitors. They even talk to the company suppliers in order to understand if there is a strong demand for particular parts. FA’s then have these personnel at their fingertips in order to make educated decisions that can help their clients grow their assets and remain averse to huge amounts of risk.
Why DIY?
-Doing it yourself can save you money in the short run, and it can be very financially rewarding if you are capable of selecting valuable investments. It can however be costly if you’re not careful. You generally will pay smaller fees to buy and sell stocks or bonds, but you have to do all of your own research. This puts you at a disadvantage especially if you have no idea where to begin looking. You must also be able to track your investments regularly in order to rebalance them as needed. Rebalancing is very important because it keeps you from being exposed to a huge amount of risk that can end up costing you a lot over the long run in the case of a market downturn like 2001 or 2008 for example.
The final step is to make the leap. You will never invest if you are always waiting for the right time. Many people wait to invest because the market is too high, but then when the market turns lower, they wait because they aren’t sure how low it will go. The market has consistently risen in value since its inception. Yes there have been many bumps in the road, but it continues to rebound. With that said, make sure you diversifying your portfolio…this will be discussed in greater detail in a future post, but it can help you hedge against a large market drop. Finally, if you are nearing retirement, don’t bet the house. It is not worth it to postpone retirement or enter retirement with much less because your portfolio was invested in volatile assets.
Thanks for reading, and I will see you next week with Portfolio Diversification.
……..If you work for your money, make sure your money is also working for you…….