In personal finance there are often more questions than answers, especially if you are new to the money game, from how to start investing in stocks to growing your childrens’ 529 plans. After all, every situation is unique. To help guide you on your financial journey, we’re featuring two questions we received recently via the Rich Blog Facebook community and turned to Richard Barrington, a certified financial analyst and contributor to Rich Blog, to get the best possible answers.
Is your question not answered here? Email us at [email protected]. And, as always, these comments are intended to provide general guidance on these topics. For detailed, individual advice, consult a financial advisor.”
How to invest $10,000
Q: How does a 25-year-old with $10,000 get started in investing in a safe, pleasant, non-manipulative manner? – Justin P.
A: The first step is to decide what your goals are. Is this money going to be needed for a relatively short-term need like buying a car or a down payment on a house, or are you looking to invest it long-term for retirement?
Deciding on your goals will inform you next decisions, which are about savings vehicles and investment choices:
Savings vehicles. If you are investing for retirement, look into a tax-advantaged savings vehicle like an IRA.
You may run up against contribution limits, but if you make a contribution before the end of this year and another one early next you should be able to get the full $10,000 into an IRA. However, if the money is earmarked for shorter-term needs, you should avoid retirement savings vehicles because there is generally a tax penalty for early withdrawal.
Investment choices. You are right to be wary about manipulation – most investment advice comes with some sort of agenda behind it, usually an incentive to sell certain types of products. That’s okay, as long as the incentive is fully disclosed and the costs are reasonable. At this point though, you may not need very detailed advice. Shoot straight down the middle with low-cost investments that are fairly representative of appropriate markets for your investment time frame, and then you can get more detailed as your wealth grows.
Investing is never totally safe – you don’t get something for nothing. Growth-oriented investments can lose as well as gain money, and even a 100-percent US government guaranteed deposit account could leave you vulnerable to losing ground to inflation over time.
Definition: Inflation is a steady rise in the cost of goods and services that is expressed as a percent, such as, ‘the inflation rate is 2%.’ Curious about historical interest rates? The U.S. Inflation Calculator will show this rate through history.
The key is that even if you decide to leave the investment decisions to someone else, you can’t be totally passive. Monitor your investments regularly, and make adjustments when they no longer seem to be meeting your needs.
How to grow your investments
Q: We have Roth IRAs and a 529 plan for our kids, but don’t really know how to grow further… advice?
A: Even if you are already making the most of your IRA and 529 vehicles, there may be additional ways you can build wealth for the future:
Employee-sponsored retirement plan. If you are eligible for an employee-sponsored retirement plan like a 401k, you might find it even more advantageous than an IRA. 401ks have higher annual contribution ceilings than IRAs, and may even throw in employer matching contributions. If your current employers do not offer a retirement plan, keep this benefit in mind when you weigh future job offers.
Health Savings Account (HSA). If your employer offers a high-deductible health plan, you may be eligible to participate in an HSA. A common misconception about HSAs is that they are only used to finance near-term medical expenses, but you can accumulate any unused portion of your HSA contributions and allow them to grow tax-free. In fact, you need never pay taxes on this money as long as it is eventually used for legitimate medical expenses. Given that medical expenses are a significant portion of retirement spending, building up money in an HSA can be an important supplement to retirement savings.
Paying down debt. Paying down a mortgage or other debt is a great wealth-building move because it reduces future interest expenses.
After-tax savings. Even once you’ve maxed out all your tax-advantaged savings options, don’t overlook the value of after-tax savings. This is how you build wealth beyond tax-advantaged contributions limits, and you can minimize your tax exposure if you concentrate the growth-oriented portion of your overall asset allocation in after-tax savings, with more income-oriented investments that would incur a higher tax rate concentrated in tax-advantaged vehicles.
Finally, kudos for your focus on savings. The drive to pursue saving for the future aggressively is all too uncommon, but you should find it very rewarding in the long run.
Do you have a question for Richard Barrington? Email us at [email protected]
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This article is about Investing