Interested in Investing? Great news! Investing is the single best way to have huge compounding benefits. While there is always a risk in investing, many a smart investor has made millions with good solid choices. Still confused as to what type of investment is best? Or even what they are? With so much talk about investing, and diversifying your portfolio, it might be a good time to go back to basics! Never fear, we break down the most commons types of investing in simple terms we all can understand.
- Real Estate– My #1 investment choice is always gonna be real estate. Maybe cuz I’m a realtor? Well partly. Everyone needs somewhere to live. Does the market go up and down? Absolutely. Can we be hit hard by inflation, depressions, and everything in between? Yep. But people will always need somewhere to live. Real estate is a great investment for people looking for cash flow. Buying rental homes, or even multi-family units has proven time and time again to be the key to long term wealth. As units are paid down, monthly dividends go up. And let’s not forget about appreciation. If boughten smart, almost all homes will go up in value over time. Now, of course, there’s expensive maintenance and costs involved, but the overall gain and cash you can earn with rentals can be enormous. And let’s not forget leveraging thru appreciation. As you gain more equity, either with paying down your debt, or appreciate, you can leverage this money to buy more real estate. It’s the key to building wealth.
- Stocks– A perennial favorite is stocks. While I’ve never jumped into stocks, many have, and made millions. Stocks require much studying and analyzing, which maybe isn’t my strong suit. The simple gist is that you buy shares when they’re low and sell when they’re high. But while buying these tiny shares of businesses, there comes risk. And with any risk, can come great rewards. Ever meet somebody who’s dad bought Apple stock when it first became available and now he’s a wealthy multi-millionaire? Well, it does happen, you just have to be smart. Some of the proponents of stock say that investment gains, dividend income, ownership are some of the many great things about stocks. Be forewarned though, stock trading can be a risky business.
- Bonds– Simply put bonds are put forth by the government or corporations when they want to raise money. Basically, you give them money, like a loan, and they agree to pay you back by a specific date, with interest payments along the way. While we don’t hear a lot about bonds these days, they were quite popular during early wars like World War II when the US was raising capital to go fight wars. Bonds would be considered a safer variety compared to something like stocks. They would be considered the equivalent of like an IOU.
- Mutual Funds– Mutual funds are professionally managed funds where you pool your money with other investors to invest in a portfolio of stocks, bonds, and other securities. You earn your money from mutual funds thru stock dividends and interest on bonds, They are usually paid out once a year by the company that is managing the fund. While this could be considered a safer investment, since it’s unlikely that every stock and bond option that has been purchased would fail, we could have an economic failure that could wipe out a fund. Typically because they are investing in diverse options, this lessens the risk of losing our money.
- 401K– A 401k is a qualified retirement plan that allows companies and employees to save and invest for their own retirement on a tax-deferred basis. A traditional 401K deducts your contribution on a pre-tax basis, and you are charged tax at a later time when you withdrawal. The newer and more popular Roth IRA is contributed after taxes and is tax-free withdrawal after 59.5 years of age. Many employers will offer to match your contribution to your account, although often you won’t own that money until you’re vested after a set time limit. Most investors use a 8-10% rule on growth for 401K. This is a safer method of saving, with very little risk. Currently, you can contribute a max of $18,500 per year to your account.
- IRA– IRA is short for Individual Retirement Account. An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis. You can set up one of these on your own at a bank, or even online these days. There are two different types of IRA, the traditional and the Roth. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution; withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. Max contribution to traditional and Roth IRA are $5500/year, unless your 50 or older and it’s $6500. IRA’s differ on return rates, depending on the types of investments you decide on, but average around 8% return.
- Cash(CD’s/Money Market)– Money market account and Certificate of Deposit (CD) accounts are both safe ways of earning interest and growing your balance over time. A money market account typically has a variable interest rate, whereas a CD usually does not vary over the term of the CD. A money market account allows you access your money at any time, within the regulations of withdrawals per month on your account. A CD usually requires you to keep your money in until maturity or risk paying an early withdrawal fee. A longer term goal would probably do better in a CD, while an emergency fund money, would probably be better accessed in a money market. Money market may only yield .08%, while a CD typically yields, 2-3% depending on the length of CD, usually in 3,5 or 10-year increments. As a comparison, your local savings account typically only accrues around .06%.
So there you have it, a mini-course in our most common investments. Look for future articles where we dive in deeper to specific topics and learn more in depth. Chances are if you’re reading up on investing then you’ve started thinking about saving money. Which is awesome! Don’t be afraid to do more research, ask questions, and learn as much as you can.
Only you can decide what is the best plan of attack, what you’re comfortable investing in, and how long you’ve got to put money aside. Good luck!
