In today’s climate, it’s not enough to simply save money for retirement.
Between record-breaking inflation and the value of the dollar decreasing, retirement is a concerning topic for many people. When it comes to investing your money, the sooner you start, the more likely you are to reach your goals. In this guide, we’ll give you the basics on how to stretch the value of your dollars and develop a strategy to build your wealth.
Investing 101: Types of Investments
It’s easy to get overwhelmed when it comes to investing. There are a plethora of options available and the terminology can be intimidating. In short, investing is an all-encompassing strategy to grow your savings. The goal here is to build wealth for the long-term, fund a comfortable retirement, and leave a legacy for the next generation.
What is a stock?
A stock is a small ownership stake in a business. By buying stock in a company, you are buying a tiny share in the business. Public companies allow consumers to purchase and sell shares of their business through exchanges. Although you’re a shareholder in the company, this doesn’t mean you have a say-so in the business’ day-to-day operations. You’re trusting the company’s executives to run the business, and if you’re not happy with the financial performance of the company, you can sell your shares and invest your money elsewhere.
What is a bond?
A bond is a loan made by the investor (you) to a governmental or corporate entity, in exchange for interest payments over the life of the bond. A bond is like an IOU. Unlike a stock, investing in a bond makes you a creditor for the issuing entity. Bonds can have short, medium, or long-term maturities. On the date of maturity, the borrowing entity will return the money to the issuer.
What is a mutual fund?
A mutual fund is a financial instrument, generally operated by a professional money manager, that gives investors access to a diverse pool of stocks, bonds, money markets, and other securities. The money manager will monitor the mutual fund’s assets and aim to produce capital gains for the investors. When you invest in a mutual fund, you are pooling your money with other shareholders, so you will have proportionate stake in gains or losses of the fund.
Things to Think about When Investing
Planning for the future can sometimes feel overwhelming. Here are five things to think about when developing a plan for the future.
- Determine what kind of investor you are – Discovering what kind of investor you are is the first step in planning for the future. Knowing your investing style can help you feel empowered to create an investment strategy to determine your financial priorities, whether that be saving for retirement, caring for aging parents, or leaving a legacy for the next generation.
- Start investing in your employer-sponsored retirement plan – If you don’t already, investing in your employer’s retirement plan is a great place to start. If you’re not sure if your employer offers a 401(k), reach out to the Human Resources department. 401(k) plans offer tax-deferred investment growth, meaning you typically don’t pay taxes while your money is sitting in the account. When it comes time to take the funds out, you will then pay taxes each time you withdrawal money from the account. Many employers also contribute to your 401(k) as an incentive for employees to participate – some employers might even match your contributions.
- Talk to a financial advisor – A financial advisor can analyze your current financial situation to identify priorities and provide recommendations for where and how to save. If you prefer a more ”hands off” approach to investing, a financial advisor can also manage your investment portfolio to try grow your wealth.
- Don’t put all your eggs in one basket – Don’t put all of your money in one particular stock or bond. Diversification is important over different asset classes to help reduce risk in your portfolio.
- Don’t check your portfolio every day – Think of investing as a long-term strategy to build wealth. If you choose an account, put your money in the account and relax; you have to give your money time to work before you can reap the benefits of your investment. When you check your portfolio daily, you might be tempted to panic sell if the market starts falling, or you might pour in more money than you can reasonably afford to lose when the market is trending upwards.
Questions to Ask When Selecting a Financial Advisor
Your financial advisor will be your key partner in building a comfortable financial future. This relationship will require a bond of trust and mutual respect to reach its full potential. At the end of the day, your financial advisor is a person you’ll be sharing highly personal, sensitive information with. To help you identify the right financial advisor for you, we’ve compiled four questions to ask as you begin your search.
1. Why did you decide to become a financial professional, and how long have you been in the industry?
When selecting a financial advisor to fit your needs, you want to ensure you choose a professional with a combination of experience, stability, and confidence they’re doing their job for the right reasons. A relationship with a financial advisor is just that – a relationship. The longer you’re together, the better they get to know you, and the more effectively they can serve you.
2. What kind of clients do you work with?
Before describing what you are looking for in a financial advisor, ask them to describe the types of clients they typically work with. If this persona matches up with how you would describe yourself, then you might be a good fit to work together. You want a financial advisor experienced in working with clients similar to you.
3. How do you communicate with your clients (method, frequency)?
Your financial advisor will have their hands directly on your investment(s), so it’s important you understand how often you’ll meet with them and whether they communicate via phone or email outside of pre-scheduled appointments.
4. What is the total cost I will pay to work with you?
In addition to paying for the investment itself, you’ll also pay the advisor to manage your account(s) and other additional fees – and you want to know exactly what you can expect from a cost perspective. At the end of the day, your goal is to build your wealth. Unmanageable fees may prevent you from reaching your financial goals.
Habits That Work Against You When Building Wealth
You may be undercutting your efforts to build wealth without even knowing it. While good money habits can set you up for a comfortable future, bad money habits can leave you treading water financially. Here are three bad money habits to avoid when trying to build wealth.
- Not saving enough – Perhaps the most important step in planning for the future is to save money. Pay close attention to the dollars you might be spending on things you don’t necessarily need. These costs add up quickly and decreasing these expenses could give you significantly more money to save.
- Carrying too much debt – If you’re carrying excess debt, every effort should be made to reduce the size of your credit card bills, student loans, and other consumer debts. These debts pull money away from the pursuit of your long-range financial objectives and it’s best to eliminate these as quickly as possible.
- Investing too conservatively – Historically, equity investments offer the potential for higher returns when the markets perform well. Fixed-income investments are frequently dependent on interest rates; when interest rates are low, their value is greater. When interest rates increase, these investments are subject to increased loss in value. Accepting some risk may give an investor a chance for greater reward.
If you’re interested in investing and would like to meet with someone to discuss your options, contact an experienced financial consultant near you today.
