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Investing (Saving)

Investing:   Budgeting |  Credit Report |  529 Plan |  Finance |  Retirement |  IRA |  Stocks |  Student Aid |  Taxes |  Main Menu
Home Budgeting Goals of Investing
  • The primary goal for investing is to save enough for retirement (see Retirement Budget).  The primary timeframe that we have for investing is the time from right now until the 1st day of retirement (age 65).  Be sure to shift from higher risk investments to lower risk investments as you approach retirement.
  • You should try to save a minimum of 8 times your highest combined household salary for your retirement (See the Retirement Savings Calculator).  For middle class families, this is easily over 1 million dollars.  Unfortunately Americans only save an average of 1/20th of this amount by retirement age.  Any existing debt that you carry must be subtracted from your current savings amount.  Healthcare is usually the largest expense in retirement.
  • The secondary goal for Investing is to save enough for your children's college education.  The primary timeframe that we have for investing is the time from right now until the 1st day of your child starting college. 
  • Invest early - get started don't wait, let time work for you, rather than having time work against you.
  • Investing makes your money work for you rather than you having to work for it.  Your investments will provide liveable income when you are older, retired, and no longer working.
Beginner Investments Existing Debt
  • If the expected rate of return on a particular investment is less than the interest rate you are currently paying on an existing debt (e.g. high interest loans, credit cards, etc...), then you should pay off the highest-interest debt first.  See How to Get Out of Debt and Budgeting (debt).
Stay Diversified
  • Make sure your portfolio is well diversified.   After you leave a company, it is a good idea to rollover and diversify your 401K.
  • It is generally recommended to keep 15% to 33% of your portfolio in diversified foreign investments.
Important Investing Videos You Should Watch Understanding the Impact of Fees
  • A 2% management fee will consume 66% of the value of your investments by the time you retire.  (See Frontline - Retirement Gamble)
  • Fees (the "Expense Ratio") on ETFs are much less than mutual funds.   ETF Index funds have traditionally had excellent long-term track records and provide a good "minimal maintenance" approach to investing.
  • Information on fees for ETF's and Mutual Funds within your portfolio can be found in your prospectus.  These include fees assessed for purchase or redemption of the fund, known as the "sales charge" and Internal management fees, known as the "expense ratio".
  • Fees on mutual funds can be researched here.
  • If you hire a company to manage your entire portfolio, you will pay a fee of 1% to 1.75% of the value of your portfolio each year that you retain them.
  • Although fees may appear at first glance to be small, over time, most financial plans, retirement plans, annuities, fixed-index annuities, and "life insurance as investment strategies" will make more money for the financial service company than they will make for you.  In many cases, you will provide all the money; you will take all the risk; and you will receive only a third of the profit of the investment.
  • Remember that expense ratios cost you money even when your investment is losing value which allows the fund company to earn money from your investment at the same time that you are losing money.
Life Insurance for your Dependents
  • When you are older, you will likely have assets to will to your children which is generally more sensible than purchasing variable, universal, and whole life plans.
  • Term life is good idea if you have dependents that are financially dependent on you and you don't yet have sufficient assets to will to and provide for your dependents.
  • Be sure to have your will and living revocable trust in place.   Check the benefits plan that you have at your workplace.   Many companies have group legal plans that can provide a cost-effective way to create these documents.
IRA's (and 401K)
Tax-deferred Individual Retirement Accounts (IRA's) should be a primary investing tool.
  • 401K | 403(b) | TSP (Thrift Savings Plan)
    • Take FULL advantage of your 401K plan at your work and matching employer contributions to save money.  In 2017, the Maximum Contribution to 401K was $18000 (for under age 50) and $24000 (for age 50 and over).  You can evaluate your 401K plan at
    • You can rollover your 401K to an IRA without penalty when you change jobs and work for a different company or after you turn 59½.
  • Roth IRA
    • Make every effort to contribute $5000 per year into a Roth IRA, or $6000 per year if you are over 50.  See Roth Contribution Limits
    • You have 15 months to make a contribution to your Roth IRA for the current tax year.  For tax year 2017, for instance, you can make a contribution any time from January 1, 2017 to April 15, 2018 (the tax filing deadline).
  • Traditional IRA
    • The maximum contribution to a Traditional IRA tends to change from year to year. 
Using an HSA as a Retirement Account
  • Since healthcare will likely be a significant expense in retirement, using a Health Savings Account (HSA) that offers low-expense-ratio investment options (like index funds) may be an excellent retirement account strategy.   Your HSA money can be used for qualified medical expenses in both current years and in retirement.   Your HSA savings money NEVER goes away and follows you even if you change jobs many times.   Adjustments to your HSA contribution can usually be made at any time during the year.   You can even reimburse yourself for qualified expenses made in previous years as long as your HSA was active at that time.   Contributing to your HSA lowers your taxible income effectively saving roughly 30% on health care expenses.   Money used for qualified medical expenses is NEVER taxed: (1) NOT Taxed when you contribute, (2) NOT Taxed when you spend it on qualified medical expenses. This makes the HSA even better than an IRA which is either taxed when it is put in, or taxed when it is removed.   Worst case?   Well, if you use your HSA money in retirement for NON-medical expenses, then it is taxed the same as an IRA account.   One caution, there are limits to the amount that you can contribute to an HSA each year, and penalties for going over this, so be sure to check with your HSA provider.
Shielding Investment Earnings from Taxes in Retirement Types of Investments
  1. Stocks
  2. Bonds
    • Helpful information about investing in bonds can be found at
    • Municipal Bonds.  Municipal Bonds are exempt from federal taxes (a significant benefit if you are in a high tax bracket).   Municipal bonds within your own state can also be exempt from BOTH federal and state taxes.   Adding municipal bonds to your taxable investment account (not your IRA), can potentially be a good strategy.
    • Treasury Bonds,, 800-553-2663.  Treasury bonds are exempt from state and local taxes.
    • Savings Bonds,
    • TIPS and Series I bonds automatically adjusted so they are protected from Inflation.
    Bonds are rated by Moody's, S&P, and Fitch for investment safety and risk of default.  BBB and above are "investment grade" bonds.  Below BBB are "speculative / risky" bonds.
    Bonds tend to decline in value as interest rates rise.
    Steady income can be obtained by using bond laddering. If interest rates are high, then Bond investors can improve their return by riding-the-yield-curve
  3. Mutual Funds and Exchange-traded Funds (ETFs).  Mutual funds are dynamic portfolios of stocks and bonds.  Seek mutual funds with lower loads and a favorable share class.  Depending on your goals, there are many types of mutual funds to choose from.  The vast majority of ETFs aim to track an index such as the S&P 500.  You can also choose active or passively managed funds.  Choose open-end mutual funds and avoid closed-end mutual funds.
    Equity fundOnly stocks
    Bond fundOnly bonds
    Balanced fundBoth stocks and bonds
    International fundOnly foreign assets
    Global fundBoth US and foreign assets
    Large-capLarge companies
    Small-capSmall companies
    Mid-capMedium sized companies
    Sector fundA particular industry
    Value fundUndervalued stocks
    Growth fundfor Capital Appreciation
    Growth and Income fundfor Capital Appreciation and dividend and interest income
  4. Certificates of Deposit
Enroll in a 529 Plan to Save for Your Child's College (Tax-Free) Strategies for Investing
  • In general you want to:
    1. Start investing as early as possible.  To allow the time needed for our investments to grow and for compounding to work, we need to start investing when we are young if at all possible.
    2. Make sound investments that offer good rate of return that surpass the rate of inflation.  We typically invest in the stock market because it historically has had better rate of return than other less risky types of investments like savings accounts and cds.
    3. Create a broadly-diversified portfolio.  Your broker or financial advisor can provide you with an analysis of your current diversification and can make suggestions on how to improve it.
    4. Maximize tax deductions using IRA's and your company-provided 401K.
    5. Minimize or eliminate trading fees and investment fees such as portfolio management fees.
  • If the Efficient-market hypothesis is correct, then you cannot beat the market return.
  • Trying to time the market usually doesn't work.  Investing the same amount each month (i.e. Dollar cost averaging) is effective and simple.
Tax implications of investing
  • If you make a trade and realize a profit on an investment that you have owned for less than a year, you will need to pay short-term capital gains tax
  • If you make a trade and realize a profit on an investment that you have owned for more than a year, you will need to pay long-term capital gains tax
The Risks of Day Trading vs. Buy and Hold Risks of Investing Stock Market App for Your Smartphone
  • Many free stock market apps are available for your smartphone.  Download and install one.  Enter the stocks, ETF's, and mutual funds from your current investment portfolio into the app so you can monitor your investments anywhere and at any time.
  • Read and keep only the latest prospectus for each of your current investments and any that you are thinking about buying in the future.
  • Your Prospectus will provide:
    • Fees assessed for purchase or redemption of the fund, known as the "sales charge".
    • Internal management fees, known as the "expense ratio".
    • Investment objectives and management philosophy
    • The funds pas performance over the last 1 year, 5 years, and 10 years.
Stock Trading
  • See the 3 order types, how and when to use them.
  • When selling a stock, the highest currently available price is the "bid" price.   When buying a stock, the lowest currently available price is the "ask" price.   The difference between the two prices is the "spread".   In a trade, the "spread" money becomes the property of the broker.   Popular stocks or funds that have millions of customers will have a small "spread".   A small "spread" can make buying and selling easier and less costly.   Be sure to consider the spread between a stock's current value and the bid price when selling a stock.   Be sure to consider the spread between a stock's current value and the current ask price when buying a stock.
  • Generally, you should sell your losing stocks and keep winning stocks in the market.   Selling losing stocks within your taxable or Roth IRA accounts allows you to take a tax deduction if you itemize.   If you find yourself with more capital losses than gains for the year, you can use those losses (up to limited amount per year) as a write-off against ordinary income.   Depending on circumstances, these losses may be put on 1099-DIV, Schedule D, or 1040.   You may deduct traditional IRA losses only if the total balance withdrawn is less than the after-tax amounts (basis amounts) in your traditional IRAs.   Because of the tax deduction "safety net", it is generally a good idea to concentrate your more risky investments in your taxable investment account.
Investing:   Budgeting |  Credit Report |  529 Plan |  Finance |  Retirement |  IRA |  Stocks |  Student Aid |  Taxes |  Main Menu

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