Have you reached a stage in your life when you can pay your bills easily, and you have extra cash every month? Or have you received an inheritance, a large bonus, or a pension plan distribution? What investment would you choose?
Imagine putting that extra money to work for you with a perfect investment that:
- The perfect investment would offer a reasonable rate of return.
- The returns would be high enough to beat inflation and taxes and meet your goals.
- Is would be completely safe.
- You’d never have to be concerned that you’d lose any part of the investment due to market risk.
- Your money would always be available. You could have complete access to your cash anytime without any penalty or market loss.
- It would provide freedom from income taxes.
- You would keep everything your perfect investment earned.
- The perfect investment requires no skills or knowledge.
- You could forget about the investment and enjoy your life.
The reality: The perfect investment of your imagination does not exist. In the real world, you, as an investor, have to choose from complex investment tools, each with their characteristics and purpose. Ask yourself: Why are you investing? Retirement savings? Vacations? Education for the children? Emergency funds? Many good solid reasons exist for saving money.
An important question to ask yourself about saving goals: When will you need the money? Investment goals such as retirement, depending on your time horizon, may not need to be as liquid as an investment goal of having access to emergency funds. Liquidity refers to how fast an investment can be turned into cash without losing any dollars.
How much risk are you willing to take? Can you afford to lose a portion or even all of your money? Think about the impact of a loss may have on the investment. Generally, the higher the risk, the higher the potential return. And the lower the risk, the lower the potential return.
Is tax liability a concern? Sometimes income tax liability may have a significant, negative impact on your investment results. For example, many people with high income invest in municipal bonds because the bonds’ interest is generally exempt from federal, and often state income tax. Qualified retirement plans, life insurance policies, and annuities can be a preferred vehicle to accumulate money for retirement because no tax liability exists until the money is withdrawn.
What is the economic outlook? As you probably noticed, the state of the economy can affect everything including investments. When inflation is high, tangible investments such as real estate, precious metals, and collectibles may experience good results. During stable or declining inflation, intangible assets such as stocks and bonds may do better.
Do you have what it takes to manage the investment? You may not have the specialized skills, experience, and knowledge needed to select or manage an investment. Consider getting professional investment advice or investments where such advice is available.
How much money do you have to invest? What you can or should invest in depends on your personal situation. A smart direction to determine your available investing opportunities would be to write down your after-tax income while comparing your monthly budget. It is a great place to start. If you work for a company or organization that offers a 401(k) or similar plan, it might make sense to begin retirement investing there.