Personal Finance And Investing

22 February 2009

Investing Step 10: Techniques

Once you’ve decided how your money should be allocated, it then becomes a matter of execution. There are many details that can make a tremendous difference in how your returns are realized. How you get your money into its allocation is nearly as important as what allocation you choose.

Some key techniques are diversification, dollar cost averaging, index funds and rebalancing.

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20 February 2009

Investing Step 9: Allocation

After all your tax-deferred accounts are being used to their maximum potential, it is time to fund any other accounts. Once that is done, you need to start deciding how to allocate your funds. This is the problem that many people did not properly address before the real-estate bubble burst and is the most important step to maximizing your returns.

The key components in making these decisions are time horizon and risk aversion.

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18 February 2009

Investing Step #8: Health Savings Accounts

The Health Savings Account is becoming a more popular option recently. It is a great opportunity to save money on your medical insurance. Despite that it is still an under-used option.

Health Savings accounts allow you to contribute money to an account who’s funds are designated specifically for health uses. While many people might not immediately see the value in this, it represents an option in which you can almost immediately recoup a large percentage in savings. If you are in a 33% tax bracket, then every expense you make using this account is essentially at a 50% discount.

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16 February 2009

Investing Step #7: Home Ownership

While there are not explicitly tax-deferred savings plans for housing, the Roth IRA can work very much like one. If you are looking to buy your first home in the future, more than 5 years from now, or if you have a Roth IRA opened already, such an account may be a very reasonable option for your investing dollar. While you cannot take your contribution out pre-tax, any income you make over those 5 years can be used tax-free to buy a house, up to $10,000 per person. This can be a considerable savings.

While retirement and college may seem like distant issues, buying a home is much closer on our investment timeline for most of us. If you already own a home, or have in the past, you can pretty much skip this section as a Roth IRA will not do you much good. Its exemption for buying a home only applies to first time buyers, but it can be very powerful for those looking to maximize their earnings.

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14 February 2009

Investing Step #6: College Saving

The next event or investing horizon is College. Obviously in some cases a first house may be sooner than college, or even in more rare cases retirement may be further off. In general however money that is invested in College Savings Plans will be tied up the second longest, next to your Retirement Accounts.

Due to the wide variety in the plans there can be many key details, but ultimately the primary consideration in these plans is the likelihood that this money will be used for college. If it is not, then the money will be taxed when withdrawn, as well as a 10% penalty, similar to early withdrawal in a retirement account. At the same time, college can be a major expense in a family’s life and the tax benefits of these accounts can be huge.

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12 February 2009

Investing Step #5: Retirement Accounts

Retirement accounts are probably the type of tax-deferred vehicle with which people are the most familiar. The number of people invested in the stock market has skyrocketed in the past two decades, much of which is owed to tax-deferred retirement accounts.

All of these plans have many things in common but also many nuances, be sure to do research and consult with a professional. However there are also many truisms that can help you make good decisions.

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10 February 2009

Investing Step #4: Tax-Advantaged Accounts

Why pay taxes? A lot of people claim they wouldn’t if they didn’t have to, however many of us are voluntarily paying taxes on money would could be earning tax free. You probably know already what I’m talking about, tax-deferred accounts. These are investment accounts where your taxes are either paid when you take the money out, or sometimes not at all. Many people are familiar with retirement accounts like 401(k)s or IRAs, but there are other options that are often overlooked entirely. Many times if you know you’re going to have an expense in the near future you can pay for that expense tax-free. This many not seem like a big deal to you but let’s do some simple math.

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8 February 2009

Investing Prerequisite #3: Goals and Time Horizon

Once you have cleared out all your debt and created an emergency fund, it’s time to think about why you’re investing. It is impossible to have a strategy without knowing what the strategy is intended to accomplish. The investment strategy of a 20-something trying to buy a house, a 40-something trying to save for their children’s college, and a 50-something trying to catch up for retirement are very different.

The sooner you need the money, the less risky that segment of your portfolio should be. Riskier investments typically give better returns over the long haul, but in the short term they can be disastrous. The when of your strategy will be the single most important question in determining an investment strategy.

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6 February 2009

Investing Prerequisite #2: Expanded Emergency Fund

Many people will debate the details and priority of this, but quite simply there is no reason to begin investing until you have enough liquid cash to survive for a reasonable period. Unfortunately, this can mean different things to different people.

What does liquid mean?
What does reasonable mean?

You need to answer these questions as soon as possible.

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4 February 2009

Investing Prerequisite #1: How To Deal With Debt

Deciding when and how to pay off your debts is not a simple matter. While it can be comforting to be debt-free, that may not always be the most financially expedient approach-nor is it the whole picture. Here are a few steps, including analyzing and paying off debt, that really make your money work FOR you.

First you must establish a fund to allow for emergencies in your life. Then you need to adopt a strategy for getting rid of the rest of your debt. The freedom this will allow you is key in making investments. Paying off your debts is a must before proceeding.

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