An investment is an action or process of purchasing an asset or an item. This is done in the hope that it would appreciate or generate an income in the future. Investment is one of the best ways to make sure the money grows. This is also a form of saving for a rainy day. Buying stocks, bonds, and mutual funds are the easiest forms of investment. A 401(k) account or an individual retirement account are types of investment as well. Understanding the stock market may be complicated, however, investing right is something anyone can do with a little education on this subject. Before investing one must make sure to pay off any high-interest debt and also to have an emergency savings account. Once these are taken care of, the individual can begin investing. If you are wondering how to invest your money to save precisely, read on.
There are many bits of advice available on the best stocks to invest in and the different ways on how to invest your money. One of the main factors that the planning professional would need to know at the time of investing is the time horizon. Time horizon is when the investor would require the money. The money required in the next 2 years has to be treated differently than the money required in 20 years post retirement. The most significant flaw while investing is lumping all the money into a single account or fund. Before investing, one must always plan the funds required for the various necessities and bifurcate it accordingly. Every account must have a purpose and must have different investment strategies. On deciding this, one can invest either short term or long term accordingly.
When putting away money for a short term, it is better to save than invest. Especially, if the money is required in less than three years, it would be better to protect it from the volatile market. Many investors make mistakes in the short term and end up investing in funds when they see a good interest rate. But they do not realize that these accounts require them to take a risk and this gamble shouldn’t be taken with funds meant for a short term. Instead, the following options can be a good idea for how to invest your money for a short term.
High-yield savings account: Instead of investing the money which is for use in the next six months it is better to save it in a high yielding savings account. Also, it is hard to find the right investment for short term. The high yield accounts might pay slightly more than 1% interest but it is the best bet to keep the money safe and available. In this case, the investor must look at stability over gains.
CD ladders and money market accounts: By placing money in the certificate of deposit instead of a savings account, one might be able to earn a little more. But, the clause is to invest the money for at least a year or more. If not, the money must be set up with varying dates of maturity, to keep the cash liquid. By doing this, the investor ensures some part of the savings is available on short notice. There are many money markets that offer similar interest rates to CD ladders and have fewer restrictions. However, they may have a limitation on the withdrawals per month.
Short-term bond funds: If you want to invest your money for a short term and have a time horizon of more than 18 months, then the money can be placed in stable investments. These bond funds are a way to increase the returns with relatively fewer risks. The gains on this are minimal compared to other investment plans. The rate on these investments are around 2%-4% for even the best bonds with 10-year annualization.
Fixed income funds: These funds offer a stabilized return that is more than what is earned through the savings account or market accounts. These funds include bonds and also offer securities. Though fixed funds do not provide gains, they are designed to minimize risk and losses in the market.
Money that can be spared for more than 3 years can be invested (or at least part of it) in stock market equities. Investing in the stock market has its share of risks. However, if the investor has a time horizon of 5 years, they can afford the risk of a down market since the investment will be rebound, most likely, before the cash is required. The best long-term accounts for investment are:
401(k)s and IRAs: These are tax-favored accounts that are mainly for the money to be used after retirement. The advantage of these accounts is that they offer an immediate tax deduction or tax-free withdrawals for the future. They also offer a target-date fund which are set up on the basis of retirement. The funds are automatically invested into less volatile bonds and investment options, as the retirement year draws close.
529 plans: These offer a tax exemption for educational expenses. This plan also has a target-date and can be selected based on the child’s college age.
Index funds and ETFs: If the long-term money is for buying property or for business purposes, it would be wise to open an investment account. Index funds and exchange-traded funds offer low fees and best value, in these accounts. Index funds keep up with the market but ETFs are variable. Plenty of research is required before investing money in this as there are many risks. It is best to talk to as many advisors as possible before investing a huge sum of money into a fund.
Every investment will have pros and cons. Always be prepared and do a complete research before getting into any type of investment.
