Where Can I Put My Money?
Adapted from the Newsletter,
The Young Professional's Guide to Financial Success
"A Just Get to the Point Newsletter"
Today, I'd like to discuss the issue of how you determine what and where to save.
My hope is that you walk away knowing what some common investment vehicles are and how they are used. There are laws governing these accounts and I could not possibly go over everything, but I'd like to give you a basic understanding of what is out there.
Your timeline and which investment vehicles to use are interlinked.
Your Timeline
The first thing that you have to determine is your timeline. If you need to save for something within a year (a downpayment on something, for example), you probably need that to be in cash. As nice as it sounds to put your money "to work for you" in the market and boost that savings, realistically, that's not going to work. Dreaming of finding that one stock that costs $1, then becomes the next Amazon, making you fabulously wealthy, are just that: dreams. It's not that that can't ever happen, it's just too risky for short-term savings.
Short-term means saving the old fashioned way. This could be in a regular savings account, a high yield savings account, or even CDs if they are paying enough interest for you to lock your money up for a short period of time.
If you are looking at longer-term, like 7-10 years, then a brokerage account might be a good option. At this time frame, you are able to find some lower risk investments and ride out some of the ups and downs, although you need to determine how much ups/downs you have the stomach for and how much of the capital you can afford to lose. And remember: any gains are taxable when you sell, as are any dividends in the year they are paid.
If you are talking about retirement, then you are talking about tax-sheltered retirement account, such as a 401(k) or IRA.
Investment Accounts
There are a few options for investments. You could open an account with the US Treasury Department and buy government treasuries.
Some banks have limited investment choices, too.
Generally, though, if you are investing on your own, then you are talking about opening a brokerage account. There are many options, from Schwab and Fidelity to Betterment and Robinhood, just to name a few. For the most part they do the same thing: you open an account, wire in money, then buy whatever stocks, bonds, or funds that you have decided match your risk profile and timeline, then sit back and hope they grow!
If you are saving for retirement, then there are both employer-sponsored accounts and ones you can set up yourself.
The most popular employer sponsored plans, which are named after the tax code that created them:
401(k), 403(b), 457
Some plans may offer a "Roth" option, which is named after the Senator who proposed it, and it means that you pay taxes on the money you put in, but it grows tax-free. This is the same concept as the Roth IRA, but is not the same thing.
Anything employer sponsored is set up to take the money out of your paycheck before you see it. For many, this is a very good thing. When you have one of these employer sponsored programs, you should think of it like a menu in a restaurant. You want a few good things, but you probably don't need too much. How to determine which items to invest in is beyond the scope of this right now, particularly because each one is different and has different offerings, just like each restaurant is different.
Remember also that each offering is a fund, which means they are all diversified in their own way.
One bonus of an employer-sponsored plan is that many employers (but not all, so you need to check) match a certain percentage. This is the closest thing to free money that you can get!
The downside to these plans is that there are fees involved and if there is a professional assigned to help you, that person is almost certainly paid by the company that sponsors the plan. Also, the fund choices are limited to what is in the plan.
You can contribute a certain amount per year (for 2023, for example, it is $22,500).
Then there is the retirement plan you make for yourself:
Individual Retirement Arrangements (IRA)
There is the traditional and the Roth. Traditional means your contributions are tax free and Roth means you pay the taxes up-front, but not on the growth. Here is a famous case of what that could look like (note: results from that link are not typical 😂).
You set up an IRA the same way you would set up a brokerage account. The only difference is that there is a limit to what you can put in (this year it's $6,500) and if you take any of the money out, you pay taxes and/or a penalty, unless you meet certain conditions- typically starting with attaining 59 1/2 years old.
In an IRA, you can buy any stock or fund that is available. This is a major advantage, but can also be overwhelming if you do not know what to look for.
Conclusion
There are many options for where to invest and what to invest in. The choice comes down to the purpose, the timeline, and what is available to you.
There are rules for whether and how you can use some of these separately or together, but conceptually I hope this helps!
Wishing you a prosperous career!
And of course, the fine print:
CVW Financial, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
