If you want to build your wealth, just start. So simple, yet so true. In my previous blog post we talked about the power of compounding. In other-words letting your money work for you. Here’s the catch. You actually have to actually put money into an account to take advantage of compounding or any other kind of investment vehicle. This is when the reality check happens. How can you predictably put aside an amount of money that you can set aside for investment purposes?
The answer is simple … and not so simple. Let’s start by asking yourself the following questions:
· How much money do you make?
· What are your obligations?
· And, how much money is left over that you can put toward emergencies, investments, and retirement?
Because you see, you really do need to fill the three buckets of saving – emergencies, investments and retirement. This holds true whether you are 25 or 55 years old. You need to plan based on your reality and you have to start sometime!
Now that you have decided that investing for your future is a good thing, something always happens to set you back. You need new brakes, your roof leaks or your kids need braces. Life happens at the most inopportune time putting your best plans on hold – yet again. But, by putting aside just $50, or more if you can, every pay period for investments/retirement you can begin to build real wealth.
Treat savings like an expense. Decide how many Starbucks you can forgo and put that money in a Roth IRA or a low entry point investment account or any number of other investment vehicles accessible to entry level investors like the ones listed below.
· Roth IRA
· Exchange-traded funds (EFTs)
· Mutual Funds
· Certificates of Deposit
Many of these investment/savings vehicles can be linked to an automatic deduction feature of your checking account making putting away money just another bill that you have to pay.
The Roth IRA is one of the best and easiest entry level investments to open. Roth IRAs offer new investors the ability to receive tax-free income later in life. You are not taxed on either the contributions or the earnings growth when the funds are withdrawn in retirement. That can result in a significant nest egg after decades of compounding growth. Contributions to your IRA can be made through automatic deductions from your checking account.
Many companies offer their employees 401k accounts. If you are lucky enough to work for a company that offers these and qualify, consider taking part in this program. A 401(k) plan is a qualified employer-sponsored retirement plan that eligible employees may make tax-deferred contributions from their salary or wages on a post-tax or pre-tax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a401(k) plan accrue on a tax-deferred basis. When you finally withdraw funds from your plan at retirement, you begin to enjoy the earnings of this plan but also face the tax consequences. Taxes on these accounts may vary depending on the type of account you open and when you take distribution.
Exchange-traded funds or ETFs have been growing in popularity since they were introduced over 20 years ago. Like stocks, ETFs can be bought or sold on an exchange at any time during the trading day. Like a mutual fund an ETF holds a bundle of assets like “tech stocks” or “eco stocks”. Entry level for these stocks can be very low and are worth looking into if funds are limited.
Mutual funds are similar to ETFs. They are both bundles of stocks but operate a little differently. The main difference is that ETFs generally have lower management fees and commissions than mutual funds. Mutual funds generally have higher minimums – sometimes a $1,000 or more. Mutual funds can be a great vehicle if you are able to put away a fixed amount of money every month and can qualify for the entry requirements.
Certificates of deposit are probably among the safest investments because they are insured by the FDIC or Federal Deposit Insurance Corp. Because the government insures the money, you can’t lose it in a “failed” investment category. Because of the safety of this investment, the interest rate paid is generally lower than a higher risk investment. And the penalty for early withdrawal is quite high.
The bottom line is that there are a variety of investment opportunities available to all – regardless of age, income and gender. But the calculus for success is this: Pick an investment and fund it, fund it, fund it!
This blog post gives you a brief overview of some of the strategies and vehicles available to investors at every entry point. If you’d like to learn more speak to a qualified investment planner or join us at our next Office Hours Kennett on Thursday, June 27th at The Creamery as Suzanne Heron of Lovett Advisors LLC walks us through how to create an investor mind set and plan for any age of investor!
Register today at www.officehourskennett.com