Simple Investment Strategies for Retirement, College and Emergencies
You can make all types of investments, investments of time, of money and of effort. You can make emotional investments and you can make investments in your career. You will be happy to learn that I am not going to comment on all these! We will concentrate on financial investments. Specifically, the financial investments average folks make as they begin to save for retirement, their children’s college education or maybe that once in a lifetime European vacation.
The investments listed below represent my favorites for each of these three categories. Please read on and I’ll explain.
Retirement
Roth 401(k)
- I hope your employer is one of the many offering this investment retirement account. Although designed with the high earner in mind, it works equally well for the rest of us. I like it because there are “zero” tax consequences when you begin taking your distribution.
Roth IRA
- I am a firm believer in having an IRA over and above your 401(k). I like the Roth IRA for the same reasons stated above.
Traditional 401(k)
- Your employer may not offer a Roth 401(k) but don’t pass on the opportunity to participate in a Traditional 401(k). It will serve you well in your retirement years. You can always complement your Traditional 401(k) with a Roth IRA. In the traditional 401(k), contributions are made with pre-tax income. This can help your cash flow during your earning years. Many employers offer a “matching” funds program up to a specified percentage of your earnings. If you don’t take advantage of this, you are leaving free money on the table.
Traditional IRA
- Tried and true, the Traditional IRA is funded with pre-tax earnings and as with the traditional 401(k); it may be just the ticket for your financial circumstances.
Education
529 Tuition and Savings Accounts
- These plans are fairly new but they offer a wonderful way to tuck away money for college. You can have a prepaid tuition plan and savings plan. Interest income is tax-deferred and as long as the funds are used for the purposes intended, there are no tax consequences at withdrawal. Unlike the Coverdell ESA, you own the plan, not the student. This is a big plus if you decide to disown your children….just kidding! The 529’s offer a wide variety of options much like an IRA and some states give you a break on state income taxes, some do not. Check with your state for particulars.
Coverdell ESA
- The Coverdell ESA has been around for some time. They have their plusses as well. Unlike the 529’s, the annual cap for contributions is $2000.00. The plan is owned by the student and eventually, whether or not the child goes to college, it will revert to him/her. No further contributions are allowed when the child attains the age of 18. ESA’s work just like a Roth IRA so they are easy to understand and here’s the real plus. The funds can be used for private K thru 12 schooling.
Series I US Saving Bonds
- Yes, I know! Your eyebrows went up. Seriously though, these are a safe, flexible investment offering tax-deferred earnings that currently return 1.76 percent. They are a flexible, highly liquid investment and if the bond is redeemed for qualified college expenses, you avoid Federal Income Taxes on the earnings!
Series EE US Savings Bonds
- Currently paying an annual rate of 0.20 percent. Minors can own these bonds…need I say more!
General Savings
Money Market Account
- Okay, low yields, but liquid.
Certificates of Deposit
- Again, shabby yield, but safe and respectable. For now, keep your investment short term.
Mutual Funds
- Respectable yield, relative safety and moderate liquidity. Make certain you read the prospectus before investing and be sure you pay attention to the expense ratio for each fund. The expense ratio tells you what you are paying from your earnings for the operational costs of the fund. Some are more efficient than others.
Series EE US Savings Bonds
- Again … don’t laugh! They offer tax deferred earnings until they are cashed out. They are easy to buy online and you can set-up automated purchases to enforce that savings habit.
While these savings investment choices are not glamorous, they are effective and reasonably safe. That is a very important consideration for the novice investor. Warren Buffett, the famed “Sage of Omaha” and one of the world’s wealthiest investors, advises to confine your investments to those you understand. These investments are very easy to understand. You will have ample time to learn other, perhaps more lucrative investment techniques, but beginning early is of paramount importance. The choices I’ve listed here allow you to get a head start and used as a foundation, you can continue to build on this foundation as your time, talents and financial circumstances permit.
Author Bio:
Jonathan McCrillis is a full time finance professional and writes for True Financial Planning. He earned his MBA with a specialization in Financial Planning in 2011 and is dedicated to helping others prosper.
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Category: Investing
