Your Money In The News:? Great Investment advice for the beginning investor, Use your tax return to increase your credit score, What to do with your 401(k) when you leave your employer, How to get the best auto loan…
While it?s ?common knowledge that the earlier you start investing for your future the better, you need to make sure that your money isn?t being wasted elsewhere before you start socking your extra change away. This in depth article by The Fool gives you investment advice to guide you from zero to hero on your journey to financial success. An overview:
Get rid of high-interest debt first
If you have consumer debt you are probably paying more in interest than you could earn investing. Math doesn?t lie. If you do not pay attention to your interest rates, you could lose money investing instead of paying down your credit card debt first.
Prepare for the unexpected before you invest
The majority of Americans can’t cover a $1,000 unexpected expense without going into debt or selling something. If you have all of your money locked into investments and something unexpected happens, you will have to sell your investments or go into debt to cover an emergency. While experts often quote 3-6 months, if you are starting from zero, pick an attainable goal like $1,000 before you start thinking about investing.
One exception to these rules:
If your company has a 401(k), 403(b), or similar retirement plan, and your employer matches contributions, definitely take advantage whether or not you have credit card debt or savings. An employer match is free money. Don?t turn it down.
Understand your investment goals
Before you invest you’ll want to get a clear picture of your primary goals. Whether you are investing for retirement, or for your children’s college tuition, you need to consider both your risk tolerance and investment time period in order to pick the correct investment vehicles for your situation.
Know how asset allocation works
Another important step before you start investing is to understand what to invest in. Learn the difference between stocks (equities) and bonds (fixed income) and so that you can make educated decisions.
Start with easy-to-understand investments
If you’re completely new to investing, it’s generally a smart idea to keep your investments broad and easy to understand. There are many mutual funds or ETFs that can make it easy for you in the beginning. Investing in stock index funds and bond index funds can help get you started while you learn more about investing.
Stocks require more knowledge
Investing in stocks can be quite lucrative if you do it right, but you need the time to research stocks and the knowledge to research them correctly. Learn all you can before you invest. Motley Fool recommends these two books for beginning investors.
- The Intelligent Investor by Benjamin Graham:
- One Up on Wall Street by Peter Lynch
Don’t let lack of capital get in your way
Don?t assume that because you don?t have much to invest that you should wait. There are many opportunities to invest today even if you can only afford $50 per month.
If you’re in a solid financial position, with little or no credit card debt and a reasonable emergency fund, now is the best time to start. Time is your best friend as an investor — even if you don’t have much to invest.
According to the IRS, more than 70% of taxpayers received refunds in 2017 and the average refund was around $2,895. Instead of blowing your refund as if it were free money (it?s not, you paid it remember?), why not use it to leverage a better financial future? Increasing your credit score will serve you in more ways than you think.?Your credit score is not only a deciding factor in your ability to secure loans at better interest rates, it can also affect your ability to rent an apartment, and more recently is even used as a character reference for employment.
Pay off delinquent accounts or late payments
Your payment history affects your credit in a major way, accounting for 35% of your FICO score. Delinquent accounts can remain on your credit report for 7 years.?If you have any overdue bills or anything that has gone to collections, get rid of them first.
Pay down your credit cards
Your credit utilization score makes up 30% of your FICO score.?The goal is to keep is to keep your debt-to-credit ratio below 30%. For example, if you have $10,000 in available credit, you don?t want to owe more than $3,000. The best investment you can make for your future is to eliminate your consumer debt. You will pay far more in interest on your credit cards than you will ever make investing.
Ramp up your student loan repayment
44 million Americans are dealing with student loans. The faster you pay off your student loans, the less you will pay in interest. Not only will you save money on interest, but reducing your debt and making on-time payments can increase your credit score.
Build your credit score with a? credit card
Unfortunately we need a credit card in order to build credit. It?s sort of a Catch 22. But if you have a weak credit score, how can you get a credit card?
A secured credit card has you put down a deposit to back up your line of credit. If you make payments on time, your credit score will increase. Eventually, it will be strong enough to qualify for an unsecured credit card. Also, using a secured credit card can help get you in the habit of paying off your credit card balance in full every month.
Save your refund to cover future debt or expenses
If you have paid down your consumer debt, it?s time to allocate money to an emergency saving fund. While this won?t affect your credit directly, it can help keep you out of debt. By using savings instead of a credit card or personal loan you will avoid high-interest debt that could drag down your credit score.
High interest rates on new vehicle loans last month reflected levels not seen since 2009. With more Fed interest rate hikes expected, unless automakers lower their prices, it is going to get more and more expensive to purchase a car. What can you do?
Clean up credit report errors
If you have errors on your credit report, they may be affecting your credit score. You are entitled to one free copy of your credit report every year. Get a copy of your credit report and make sure that the information on that report belongs to you and is correct. Credit report errors are more common than you may think. The FTC reports that roughly 1 in 5 people have errors on their credit report. ?The Consumer Financial Protection Bureau can guide you in making sure that what is reported is correct.
Put down larger down payments
A higher down payment means you may have lower monthly payment.?According to Edmunds, the ideal downpayment is about 20%. Not only will a larger down payment save you money in interest, it will also protect you from depreciation. If you only put down a small down payment, you will have “negative equity” which means you will owe more than the car is worth over time.
The biggest lenders like Bank of America, Chase, or Wells Fargo, aren?t the only place to obtain an auto loan. Deals can be found from ?captive? finance companies belonging to automakers, including Ford Motor Credit and Toyota Financial Services. And there are also credit unions, local banks, and online banks. Do research on the different auto lenders, and come prepared with questions. It?s important to know what you?re getting into when taking on an auto loan.
Are you about to leave your employer? Are you keeping your money in the retirement plan, or are you taking your savings with you?
401(k) plan managers have a history of contacting leaving employees about rolling over their balances into an IRA with them, and this isn?t always a good idea. It?s possible that you will end up with an expense ratio that increases from below 1% to 2-3%.
For example, just last month Wells Fargo got caught with its pants down again, as the U.S. Labor Department is reportedly looking into Wells Fargo’s 401(k) practices?and whether the bank is pushing its customers into more expensive plans.
So, you need to be careful. If you are leaving your employer and you have a 401(k) with them, here?s what you should know if you are contacted by the 401(k) plan record-keeper about an IRA rollover.
Keep in mind that a recent Labor Department rule which required advisors and brokers to put their clients’ interests before their own when advising on retirement accounts such as 401(k) plans and individual retirement accounts is no longer being enforced. This means that you need to be very wary about the advice your financial advisor gives you as it may not be in your best interest.
The way a representative from a 401(k) plan presents the question of “stay or go?” can nudge the employee into a course of action. For example, they may ask if you value low-cost investments with guidance to keep you in the 401(k). Or they may ask if you prefer a broader range of investment funds which would be available with a potentially more expensive IRA.
Before you roll over into whatever plan your financial advisor suggests, here are some important points to consider:
- Compare your costs: Find out how costs compare between your 401(k) and an IRA. Do not assume the 401(k) has the correct information. Double check everything.
- Learn about your in-plan options: If you stay in the plan, will you be able to draw down from your funds through retirement? If so, find out whether there are fees for transferring your savings to your checking account.
- Think about how to invest your savings in the long run: Even if you leave your money in the plan through retirement, decide how you want to allocate your funds to protect your principal. Plan sponsors cannot answer that question for you. It’s a personal decision.
What is a Self Directed IRA?
A Self Directed IRA is like a traditional or Roth IRA, but it allows you to invest in different things like real estate, precious metals, debt, businesses, and even racehorses and Bitcoin.?Since your investments are up to you, you need to know what you are doing. Because the investment options are so broad, there are a lot of rules that you have to follow to avoid getting in trouble with the IRS. If you violate these rules, you could be subject to tax penalties that eliminate any tax advantages that a Self Directed IRA offers, or even lose the balance of the IRA.
- Flexibility and diversification.
- Gives you the opportunity to pursue assets that have the potential for higher gains than traditional IRAs.
- Can offer tax advantages for high-net worth individuals who have specific investment goals in investments that they understand.
- May offer asset protection for bankruptcy.
- Not offered at most traditional brokerage firms.
- The companies that specialize in them have higher fees.
- Requires research and investment experience.
- Tricky tax and legal regulations may require the additional expense of professional tax and legal professionals.
- Certain investments such as businesses are hard to value. (You are required to report the value of your IRA annually.)
- You can be exposed to more risk than traditional IRAs.
- If not structured properly, you could lose your tax advantage status with the IRS and be on the hook for penalties.
- Self Directed IRAs are subject to Unrelated Business Income Tax. If your IRA holds a business, you could be subject to this.
Who is it for?
Self Directed IRAs are clearly not designed for the average individual. In fact, you may have a tough time finding a custodian that will even open one for you with your $5,500 annual contribution. Usually, they are sought after by those who already have enough assets in their IRAs to risk alternative investments. In short, Self Directed IRAs require a lot of cash and investment savvy. This does not necessarily mean you have to be rich to pursue a Self Directed IRA, but you do have to understand what you are doing to the extent that you can clearly see how a Self Directed IRA might or may not benefit you.
How do I start?
If you think you have a good reason to look into a Self Directed IRA, your first step is to find an IRA custodian that offers them. You can’t just put assets you already own in a Self Directed IRA. A custodian must purchase them on your behalf. Your choices of custodians are somewhat limited because Self Directed IRAs require extensive research, legal and IRS paperwork that most brokers don’t want to deal with. Here is an updated list of custodians that offer Self Directed IRAs.
You need to remember that the custodian does not make decisions for you. They can’t offer investment advice. You will also want a professional legal or tax advisor to help you make sure you are following the rules. If you don’t follow the rules, not only could you lose the tax advantage, but you could even lose the balance held in the IRA. Keeping this in mind, the actual steps to opening a Self Directed IRA are relatively simple.
- Choose a custodian.
- Fill out their paperwork and pay their fees.
- Rollover and/or contribute funds to the IRA.
- Start investing.
Alternatively, you can open a Self Directed IRA LLC. This type of IRA allows you complete control over your assets directly. You set up an LLC and direct your custodian to use your IRA funds to purchase the LLC. The LLC then holds the assets and you control the checkbook. This type of Self Directed IRA is often called a Checkbook IRA. If you see an investment you want in your IRA, you can write a check for it from LLC business account.
While a Checkbook IRA gives you more freedom and makes investing quicker and easier, it can also get investors in trouble for exactly those same reasons. In most cases, you will need to hire an attorney to advise on the creation of the LLC and the IRA. And because there is no custodian to review your investments, you’ll probably need to consult legal counsel from time to time to make sure you are keeping it clean, as well as to help you submit the annually required valuation of the IRA’s assets. If you violate the IRS Rules and Regs knowingly or unknowingly, you can be subject to fines and penalties.
The bottom line?
If you believe that a Self Directed IRA could benefit you, be prepared to do your research. Make sure that you have clearly defined goals that prove how using this IRA can bring you prosperity in the future, rather than complications. Decide how much control you want and how much counsel you should hire to protect yourself from costly mistakes. For certain investment strategies, the Self Directed IRA could be quite lucrative. But there is nothing done-for-you about it. And it costs a bit change to set up.
Retirement tip😕 Got a 401k? Make sure you understand your investment.
Photo by?Ahmad Ossayli
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Years Of Roller Coaster Cash Flow…
Thinking about money gives me heart palpitations. As a small business owner in a creative field, my focus has always been squarely on my work and my clients. I send invoices off at lightening speed so I can get back to the real work.
Small business owners, freelancers, gig economy worker bees: we have all purchased tickets to ride a financial roller coaster. Money comes and goes in unpredictable waves. It?s easy to think things will always be sunny when you?re riding high on cash flow. But I?ve had enough down cycles over the past 15 years to know I can?t get comfortable.
The elephant in the room for me is retirement. For years I reinvested profits into the business, figuring I could save for retirement at some future date. When my industry, along with every other, took a nosedive in 2008, I was forced to dip into my savings. Fast forward 9 years and I?ve managed to make the business profitable again, purchase a nice apartment and maintain a comfortable standard of living.
But I have saved little for retirement.
Looking back, I wish I’d set up an automatic withdrawal and investment account, even if the contributions would’ve been small. Compound interest would have been nice.
“Compound interest is the eight wonder of the world. He who understands it, earns it…..he who doesn’t….pays it. Compound interest is the most powerful force in the universe.” -Albert Einstein
… Means Playing Catch-up For Retirement
I am now having to play catch up and it doesn’t look pretty. A peek at a retirement calculator confirmed my fears.??The good news is, I’m putting my retirement decisions on a fast track.?A few years ago I opened an IRA account and because I cannot contribute more than $5,500 per year, I decided to invest aggressively by purchasing mostly technology stocks. So far that account is up a whopping 30%. It isn’t a lot of money and that’s the only reason I feel safe taking such a risk.
Next, I opened a SEP account through my business (something I should have done ages ago) and opted for a more balanced portfolio made up of low cost?ETFs. I am contributing the maximum allowable each year, which in my case is about $20,000. These are pre-tax dollars and I am counting on that compounding interest to help reach my retirement goals.?This plan has certainly curtailed my bottom line, which means I’ve had to cut back on my expensive sushi and sake habit. But I feel safer knowing the money is working for me.
When You’re Building A Business, It’s Hard To Save
When you’re busy building a business from the grown up retirement is the last thing on your mind. As free agents it is hard enough to keep track of all the tax liabilities, let alone a retirement account. It seems almost trivial. But time flies when you’re having fun and before you know it, your friend who’s been doing the corporate grind for 15 years suddenly has a nice nest egg and you have…..nothing.? I’ve had to re-calibrate the way I think about spending.
I used to pay my business expenses, taxes and living expenses, in that order. Whatever was left over was reinvested into the business. Now, after paying business expenses and taxes, I pay my retirement accounts. There is less money to reinvest in the business and less money for living expenses.
Predictably, this has made me a more careful and mindful consumer. If there is a piece of equipment that needs upgrading, I will purchase used instead of new. I have lowered my overhead by consolidating staff while taking on more work myself. I cook more meals at home and Trader Joe’s is my new Whole Foods. Living a bit more frugally has proven to be less stressful than I anticipated.
What Finally Helped
The anxiety of planning for retirement largely came from the worry that I might not be able to keep up with monthly or yearly contributions in a consistent manner. So I simply didn’t deal with it. What finally worked for me was?automating my retirement contributions. I made them realistic. I made them a fixed line item, like my monthly mortgage. Once I did that, I had no choice but to pay into the accounts.
Practically everyone is familiar with Warren Buffet’s ‘pay yourself first’ principle. When you are running a business, simply keeping it afloat seems like a tremendous accomplishment. Moreover, many of us believe our small businesses will in fact be part of our retirement plan. Unfortunately there seem to be fewer guarantees about the long term viability of any given small business these days. Industries, especially creative ones, are changing so rapidly, it is impossible to predict the value of an asset 20 years from now.
Although I’m more than a little late to the party, saving for retirement using traditional investment vehicles has paradoxically forced me to streamline my business and perhaps better prepare it for that uncertain future.
Darla Roost is a pen name for a gig economy creative professional thriving in New York City. Her dream is to share her stories and create a place where people can share theirs, too.?Photo by?Bonnie KittleTags: business, compound interest, consumer, featured, gig economy, investing, investments, IRA, Recession, retirement, saving, SEP, small business owner