Understanding the road to making your money growYou’re on the road to financial well-being. You’ve unloaded toxic debt and saved up several months’ expenses in an emergency fund. Now what? It’s time to get into the driver’s seat, and start investing your money. Investing is more than just saving.
By: Sherri Richards, Forum Communications
FARGO – You’re on the road to financial well-being. You’ve unloaded toxic debt and saved up several months’ expenses in an emergency fund. Now what?
It’s time to get into the driver’s seat, and start investing your money.
Investing is more than just saving.
“Investing assumes we put money into something we hope will do one of two things,” says Paul Meyers of Legacy Wealth Management in Fargo, “either pay dividends … and allow the account to grow, or grow because it increases in value … or a combination of the two, which of course is the best.”
The first place most people start investing is in an employer-sponsored retirement account, such as a 401(k) or a 403(b). Meyers says employees should make sure they maximize the money going into the plan by contributing enough to get the full employer match.
From there, investors may want to explore individual retirement accounts (IRAs), college savings accounts such as a 529 plan, and individual brokerage accounts.
Each of these investment vehicles can be considered a “wrapper,” says Sandy Korbel, senior wealth management advisor at Alerus Financial. The wrapper influences how the money is treated from a tax standpoint.
But within each wrapper are similar investment choices, for example stocks, bonds, mutual funds, real estate investment trusts or certificates of deposit.
Investment options within a 401(k) or 529 are determined by the plan’s sponsor. IRAs and brokerage accounts offer more choices.
Korbel says she’ll hear people criticize a certain investment vehicle as not performing well, when really they need to look at the investment choices within that wrapper.
“Separate the savings mode from what you’re investing in,” she says.
Investors need to make sure they are diversified within these vehicles. Korbel suggests pre-allocated risk-based investment options. While some companies offer investment options targeted to a certain retirement date, these may not align with the investor’s risk tolerance, she says.
Korbel and Meyers also encourage investors to put their money in several different wrappers, or buckets, to ensure flexibility.
Money put into a 401(k) is pre-taxed and can only be used for retirement. Early withdrawals are subject to hefty taxes and fees. That’s why people may want to look at putting some money in a more flexible investment vehicle.
Contributions to a Roth IRA are after-taxed, and can be withdrawn at any time.
Meyers recommends parents invest in 529 plans for their children’s college savings, as they are tax advantageous and also flexible. For example, if the child beneficiary doesn’t go to school, the funds can be transferred to another family member.
A 529 plan can also be a good gifting mode for grandparents, Korbel says.
Korbel encourages people to save 10 percent of their income in a 401(k) and 15 percent total. When someone asks Korbel if they should put all their money in a 401(k) or a 529, she says to do a little of both.
“It’s not an entirely exclusive exercise,” she says.
Meyers says a non-qualified investment account can be a good option for many individuals or couples.
“These are not necessarily tax-deferred investments, but they will grow just the same and give you flexibility,” he says. “Investments these days are far more liquid.”
While anyone can open an investment account through an online broker, such as Fidelity, Meyers promotes the use of a financial advisor. Besides identifying opportunities to reduce tax liability, advisors can analyze an investment’s potential, for example analyzing its price-to-earnings ratio and looking at which sectors are strong (Meyers is optimistic about health care, biotechnology, housing and auto).
“There’s a fine line between what’s a good growth opportunity and what isn’t,” Meyers says. “I don’t think the vast majority of people want to become stock market gurus or wild experts at picking stocks.
“There are so many choices in the world of investing. You don’t want to take that trip without some kind of guide,” Meyers says.