If you have a little extra money sitting in your savings account at the bank, you may be wondering if there is a better way to invest your money. With interest rates at banks and credit unions at low, stagnate levels, the answer to your question is probably yes. The decision to invest your money depends on your financial needs and conditions. Many would-be investors may be scared away from a lack of knowledge about how investing works. They may be familiar with key terms, such as stocks, bonds, and mutual funds, but may not know how to make sense of it all. Below is a crash course in different types of investments that all future investors should be aware of.
One of the most important investments that a person could make is to invest in paying off debt. Some debt is commonplace, such as a mortgage or car payment. These types of debt typically have relatively low interest rates and can actually be productive in helping your credit score, which is useful when securing future loans. But other debts, such as credit card debts, should be taken care of as soon as possible. For instance, say you have $3,000 of credit card debt and your credit card charges 12 percent in interest. There are very few investments in the stock market that are going to fetch you 12 percent. It would be wise to first invest your money in paying off high interest debts.
Another investment that many overlook is in home improvement. With home prices back on the rise, your home is a valuable asset. Protecting, or increasing the value of that asset is a great way to make use of money that you are willing to invest. Projects such as new flooring or a new roof can net big returns when it’s time to sell your home. Other projects, such as new windows, energy efficient heating and cooling units, or solar panels, can literally start paying dividends on your investment from day one by saving you money on your energy bills.
Many companies offer their employees an option to enroll in a 401(k) plan. A 401(k) allows the employee to have a portion of their wages taken out of each pay check to be placed in their 401(k) account. The employee can then use this money to invest in various stocks, bonds, ETF’s, mutual funds, or other securities. Many employers also offer to match an employee’s contributions up to a certain amount. If your company offers to match your contributions, it is wise to contribute, at a minimum, the amount in which they are offering to match. For example, if your employer offers to match your contributions up to 3 percent of your salary, then you should contribute at least 3 percent of your salary. This is quite literally free money that your company is giving you to invest. There is no investment in the stock market that is going to guarantee you this kind of return, so take advantage of it! Another advantage a 401(k) offers is that your money is contributed pre-tax. This means you have more of your money going to work for you. However, you cannot withdrawal your money from your 401(k) until you have reached the age of 59 ½. If you withdrawal early, you are subject to a 10 percent penalty. Also, taxes will be taken from any withdrawal you make from your 401(k), regardless of age. If you are self employed, or your company doesn’t offer a 401(k), there are still options. There are individual 401(k) plans and plans for small business owners. However, you may want to consider an IRA, because its rule structure may benefit you in the long run.
An IRA, is an individual retirement account. They come in a couple varieties; the traditional IRA and the Roth IRA. The traditional IRA allows you to put money in to an account after you have paid taxes on it. The dividends and returns you receive are tax-free while your investments pay dividends in your account. You are only allowed to contribute $5,500 a year if you are below the age of 50, and $6,500 a year if you are between the ages of 50 and 70 ½. You cannot remove money from the account until you are 59 ½ and you must begin to take money out beginning at age 70 ½. The money taken from a traditional IRA is taxed as earned income.
A Roth IRA has the same contribution limits as a traditional IRA, and you also pay in to them after taxes. The difference is, if you make more than $114,000 and are filing single or $181,000 and filing jointly, you do not qualify. Also, you are able to take out money, up to the amount you have contributed yourself, at any time and it is tax-free. You may begin taking money out, including the dividends and interests accrued, beginning at age 59 ½. This money is also tax free. Another benefit is that you don’t have to take money out of the account if you don’t want to, regardless of age. This is an advantage over a traditional IRA because you can pass your Roth IRA on to your spouse, children, or grand children as part of your estate and your money will continue to grow, completely tax free! A Roth IRA is advantageous to young investors who expect that they will retire in a higher income bracket than they are in now. This is because the taxes are paid up front, when you are in a lower income bracket and therefore, paying a lower tax rate.
Investing is for everyone. You don’t have to have a lot of money to begin investing and you don’t have to understand economics or the stock market either. By making sure you are following the rules and making the right decision for your own financial situation, you can begin to become wealthier by making your money work for you!