Investing 101
Investing can be a great way to create money for your future. With the proper planning and considerations, investing can generate passive income separate from your salary and other revenue streams. While it’s not always the right time to invest, knowing the different options available to you is important. Understanding the different investing options is critical to building your financial literacy toolbox and helping you reach your goals.
Investing Considerations
There are a few key considerations to reflect on prior to beginning your investment journey. First, it can help to determine your future goals and savings plan. Do you want to save up for a short-term emergency fund? Are you in it for the long haul and investing for retirement? Is one of your financial goals to make a major purchase in the future, like a house or car?
Additionally, assessing your current expenses and debts can help make sense of your investments and determine how much you should be investing. If your expenses and debts are high, consider prioritizing long-term savings over short-term investments to ensure your immediate needs can be met.
Finally, consider your risk tolerance – higher-risk investments can offer higher returns, but lower-risk investments can provide more peace of mind. It’s up to you to decide how much risk you are willing to take.
Below, we’ll explain two of the most popular options for investing your money: stocks and bonds.
Investing in Stocks
Investing in stocks is a way to own part of – or a share in – a company. If the company that you are invested in performs well and the value of your stocks increases, you can sell your stocks for more than you bought them. This is how you make money by investing.
Some companies also pay dividends to individuals that own stocks. This means that a portion of the companies profits are paid to shareholders. Dividends can be a source of more immediate income from owning a stock but keep I mind, these tend to be paid in very small amounts.
The value of stocks might go up significantly, meaning that the owners of the stocks can make a good deal of money. However, stocks are also riskier than some other investment options because they are tied to the performance of a single company. If that company performs poorly, the price of the stocks may go down and owners of the stocks lose money. You have to be prepared for either outcome.
Investing in Bonds
Bonds, on the other hand, are less risky and more stable. Bonds represent government debt. When you buy a bond, you are loaning the government money for a specified period, and the interest is paid to you over time.
Bonds typically pay out relatively small amounts so the earning potential is limited compared to stocks. However, since bonds pay an amount guaranteed by the government, they are not exposed to market risks and therefore are less risky investments.
Building a well-diversified portfolio of investments is the best strategy, which means investing in a mix of stocks and bonds. Professional guidance can help you determine what the right mix is to help you meet your financial goals.
Investing For Retirement
401(k)s and IRAs are the two major types of retirement accounts. The money you save in these accounts is invested by fund managers who control those accounts. Both types of accounts have things in common, such as penalties for early withdrawal of funds, however there are some key characteristics that set each apart.
If you are employed at a salaried job, your employer might offer a 401(k) as a retirement option and may even match your contributions. The money you put into your 401(k) is “pre-tax,” meaning you pay tax on that money when you withdraw it.
Investment options can vary for these plans, but investment gains you make within your 401(k) are never taxed. Additionally, these accounts have higher contribution limits than IRAs, meaning that you can invest more money in your 401(k) if your budget allows.
Investing in an IRA
IRA stands for Individual Retirement Account. Typically, IRAs aren’t employer-sponsored, meaning the account is set up by you the account holder rather than the company or organization you work for. Like 401(k)s, earnings on IRAs are not taxed, but for most IRAs, taxes are paid on withdrawals. IRAs generally offer more investment choices than 401(k)s, but there are stricter rules on how much you can contribute to that account.
Additionally, simplified employee pensions (SEP) and SIMPLE IRAs are two types of IRAs designed to allow smaller businesses and to offer retirement plans for employees. SEP IRAs can only be contributed to by employers and have higher contribution limits than standard IRAs; in fact, employer contributions can be up to 25% of an employee’s gross salary.
SIMPLE IRAs are set up differently – your contributions as an employee can either be matched up to 3% by your employer, or your employer can contribute an amount equal to 2% of your salary, which does not require you to contribute at all.
While there is no right answer for which type of investments to pursue and when, knowing your options is important to building a robust financial knowledge toolbox. Being familiar with all the tools available to you is key to meeting your financial goals. Master Your Card provides a database of resources to support your financial empowerment journey, so you can feel more confident in managing your money today.
