Written by: Justin Medeiros
- Start a portfolio
This might seem like a daunting and expensive task, but these days you can start a portfolio with even the smallest dollar amount. Online brokers will even develop a diversified portfolio for you free of charge, in accordance with the specific risk tolerance you select. You then will have to pay a small fee to purchase a basket of ETF’s, mutual funds or even individual stocks, and your money will be invested in the investments chosen using the allocation percentages deemed appropriate by the online broker for your risk tolerance based strategy. Purchasing these investments individually will result in you having to pay a commission fee for each which can become costly. Now I don’t like to recommend this strategy to everyone, but I do feel like it is a good option to get you in the game and to begin putting your money to work in a diversified and less risky fashion. You are pretty much following a similar strategy to what is used to build your 401k, so why wouldn’t you just increase your 401k contribution percentage instead?
Having a personal portfolio provides more flexibility. I believe that once you get in the game and start your own portfolio, using a strategy of first purchasing a basket of ETF’s or mutual funds that are tied to a diversified array of exchanges and sectors, you will become more apt to research your positions and other potential position possibilities, stay up to date more on current events that influence the markets and track your portfolio’s progress against returns being earned within your 401k, the S&P 500, Dow Jones Industrial Average and other indexes. When your own money is on the line, you tend to care a bit more. Over time, you will hopefully begin to recalibrate your own portfolio, moving money in and out of investments and even potentially taking a more aggressive approach to increase return potential. Keep in mind that a portfolio with investments spread across several categories (bonds, REITS, small/mid/large cap stocks, muni’s etc.) would have had a high potential to beat the overall return of the S&P 500 over the past several decades in most cases.
The overall advice here would be to start small, socking away a small percentage of your income within a personal portfolio that you continuously add to, to complement your 401k and personal savings. All serve different purposes, as your 401k is strictly for your retirement, your personal savings is for major expenses that arise, such as a new roof on a house, unexpected medical bills or car repairs and your portfolio is for increasing your own personal wealth by putting idle cash to work in the markets.
- Contribute to a 529 plan
This obviously only applies to people who have children right? Wrong. If you are planning on having children, no matter how old you are, and would like to someday help them pay for their college education, then I wouldn’t wait to start contributing to a 529 plan. 529 plans are sponsored by states, state agencies or educational institutions and allow for returns made on contributions to grow tax free. Money withdrawn to pay for college expenses will also not be subject to tax either. Lastly, contributions made throughout the year, up to the maximum amount set by your respective state, are tax deductible each year when you file your income taxes.
I always recommend using a 529 as a college savings vehicle because of all of these tax advantages. Many Americas cash out portions of their 401k, reach deeply into their personal savings and liquidate their personal portfolios to pay for their child’s college expenses as they come due. Doing this can have huge negative financial implications. First, there is a 10% penalty in addition to the taxes that need to be paid on cashing out your 401k before age 59 ½, and there are also various mutual fund fees and capital gains taxes that will have to be paid upon selling shares of various securities.
As with personal savings, 401k building and portfolio creation, a little bit of money set aside each month in a 529, over the course of the first 22 years of a child’s life or even longer if you start before having children, can equate to large sums of money.
Stayed tuned for part 3 and 3 of the Wealth Building 101 Blog Series coming shortly.
Follow Justin on Twitter: @mynextmoneymove or on facebook: https://www.facebook.com/MyNextMoneyMove/ (Stock picking for millennials and beyond)
To comment about this series and our other Financial Literacy topics on social media please use: #FHRIMoneyMoves
October 2017 – FusionWorks
Written by: Justin Medeiros
This might seem like a daunting and expensive task, but these days you can start a portfolio with even the smallest dollar amount. Online brokers will even develop a diversified portfolio for you free of charge, in accordance with the specific risk tolerance you select. You then will have to pay a small fee to purchase a basket of ETF’s, mutual funds or even individual stocks, and your money will be invested in the investments chosen using the allocation percentages deemed appropriate by the online broker for your risk tolerance based strategy. Purchasing these investments individually will result in you having to pay a commission fee for each which can become costly. Now I don’t like to recommend this strategy to everyone, but I do feel like it is a good option to get you in the game and to begin putting your money to work in a diversified and less risky fashion. You are pretty much following a similar strategy to what is used to build your 401k, so why wouldn’t you just increase your 401k contribution percentage instead?
Having a personal portfolio provides more flexibility. I believe that once you get in the game and start your own portfolio, using a strategy of first purchasing a basket of ETF’s or mutual funds that are tied to a diversified array of exchanges and sectors, you will become more apt to research your positions and other potential position possibilities, stay up to date more on current events that influence the markets and track your portfolio’s progress against returns being earned within your 401k, the S&P 500, Dow Jones Industrial Average and other indexes. When your own money is on the line, you tend to care a bit more. Over time, you will hopefully begin to recalibrate your own portfolio, moving money in and out of investments and even potentially taking a more aggressive approach to increase return potential. Keep in mind that a portfolio with investments spread across several categories (bonds, REITS, small/mid/large cap stocks, muni’s etc.) would have had a high potential to beat the overall return of the S&P 500 over the past several decades in most cases.
The overall advice here would be to start small, socking away a small percentage of your income within a personal portfolio that you continuously add to, to complement your 401k and personal savings. All serve different purposes, as your 401k is strictly for your retirement, your personal savings is for major expenses that arise, such as a new roof on a house, unexpected medical bills or car repairs and your portfolio is for increasing your own personal wealth by putting idle cash to work in the markets.
This obviously only applies to people who have children right? Wrong. If you are planning on having children, no matter how old you are, and would like to someday help them pay for their college education, then I wouldn’t wait to start contributing to a 529 plan. 529 plans are sponsored by states, state agencies or educational institutions and allow for returns made on contributions to grow tax free. Money withdrawn to pay for college expenses will also not be subject to tax either. Lastly, contributions made throughout the year, up to the maximum amount set by your respective state, are tax deductible each year when you file your income taxes.
I always recommend using a 529 as a college savings vehicle because of all of these tax advantages. Many Americas cash out portions of their 401k, reach deeply into their personal savings and liquidate their personal portfolios to pay for their child’s college expenses as they come due. Doing this can have huge negative financial implications. First, there is a 10% penalty in addition to the taxes that need to be paid on cashing out your 401k before age 59 ½, and there are also various mutual fund fees and capital gains taxes that will have to be paid upon selling shares of various securities.
As with personal savings, 401k building and portfolio creation, a little bit of money set aside each month in a 529, over the course of the first 22 years of a child’s life or even longer if you start before having children, can equate to large sums of money.
Stayed tuned for part 3 and 3 of the Wealth Building 101 Blog Series coming shortly.
Follow Justin on Twitter: @mynextmoneymove or on facebook: https://www.facebook.com/MyNextMoneyMove/ (Stock picking for millennials and beyond)
To comment about this series and our other Financial Literacy topics on social media please use: #FHRIMoneyMoves