Invest for Your Future
Once you have a good savings foundation, you may want to diversify your assets among different types of investments.
Once you have a good savings foundation, you may want to diversify your assets among different types of investments.
In this section, you'll learn about:
Betty knows by investing some of her money, she can put it to work for her.
Betty knows by investing some of her money, she can put it to work for her.
Betty knows by investing some of her money, she can put it to work for her.
Betty knows by investing some of her money, she can put it to work for her.
Betty spreads her assets among different types of investments to increase her diversification.
To make smart investment decisions, you too need to know about:
There are different types of bonds:
When you buy bonds, you are lending money to a federal or state agency, municipality or other issuer, such as a corporation.
The issuer of the bond promises to pay a stated rate of interest during the life of the bond and repay the entire face value when the bond comes due or reaches maturity.
The interest a bond pays is primarily based on the credit quality of the issuer and current interest rates.
U.S. savings bonds are government issued and government backed. Savings bonds are a low-risk way to save and invest. Unlike other investments, you can't get back less than you put in.
Series I Bonds are indexed for inflation. The earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflation.
These U.S. securities are sold to pay for an array of government activities and are backed by the full faith and credit of the federal government.
Bonds, bills and notes can be purchased directly from the U.S. Treasury at www.treasurydirect.gov.
When you buy stock, you become a part owner of the company and are known as a stockholder or shareholder.
Stockholders can make money in two ways:
There is no guarantee you will make money as a stockholder.
In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up.
Before investing in a company, learn about its past financial performance, management, products and how the stock has been valued in the past.
Successful investors are well informed.
Mutual funds are established to invest many people's money in many firms.
By diversifying, a mutual fund spreads risk across numerous companies rather than relying on just one. Mutual funds have varying degrees of risk.
They also have costs associated with owning them, such as management fees that vary depending on the type of investment the fund makes.
Stocks, bonds and mutual funds can be purchased through a full-service broker, if you need investment advice, or from a discount broker.
When investing:
The rule of 72 is a simple calculation to help you see how your investment can grow over time. Simply dividing the number 72 by your expected rate of return will show you about how many years it will take for your investment to double in value.
The rule of 72 also works in reverse. To see the rate of return you'll need to earn to double your money, divide 72 by the number of years you will invest to show the rate your investment will need to earn over those years.
Next, it's important to plan for your retirement.
Have you ever thought about how much money you will need when you retire? You are never too young to get started.
An IRA is a retirement plan offered by banks, brokerage firms, mutual funds, and insurance companies. Individuals can contribute each year on a tax deferred basis.
With a traditional IRA, you don't pay taxes on the money until it is withdrawn. A Roth IRA is funded by after-tax earnings; you do not deduct the money you pay in from your current income.
For current IRA contribution limits, go to www.irs.gov.
Another option offered by some companies is a 401(k) plan. This is a tax-deferred investment and savings plan that serves as a personal retirement fund for employees.
By putting a percentage of your salary into a 401(k) account, you reduce the amount of pay subject to federal and state income tax.
Often, 401(k) funds are professionally managed and employees have a choice of investments that vary in risk.
Remember Bob from Chapter 1? Bob reduced his debt, increased his savings and is now ready to buy a house.
He has a sizable down payment saved, so right from the beginning he will have equity in his home.
What is equity? In this case, equity is the difference between the market value of the house and the balance on Bob's mortgage.
As Bob pays his mortgage, he increases his equity. Plus, over time, his house may rise in value — giving him more money if he chooses to sell.
Bob takes a 15-year mortgage rather than the more traditional 30-year mortgage so he will own his house in 15 years.
He will make higher monthly payments on his mortgage but will build equity quicker and pay less interest.
Over the life of the loan, Bob will save $106,119 in interest payments.
This is a comparison of 15-year and 30-year mortgages for Bob's new home:
| Loan amount | $118,000 |
| Interest rate | 7.5% |
| Monthly payment | $825 |
| Interest paid over time | $179,030 |
| Loan amount | $118,000 |
| Interest rate | 7.0% |
| Monthly payment | $1,061 |
| Interest paid over time | $72,911 |
| Interest on 30-year mortgage | $179,030 |
| Interest on 15-year mortgage | $72,911 |
Now try it for yourself using different mortgage amounts and interest rates:
| $ |
| % |
| % |
For a 0 mortgage:
| Interest rate | 0 |
| Monthly payment | 0 |
| Interest paid over time | 0 |
| Interest rate | 0 |
| Monthly payment | 0 |
| Interest paid over time | 0 |
| Interest on 30-year mortgage | 0 |
| Interest on 15-year mortgage | 0 |
You can also start and invest in your own business as part of a wealth-creation plan. This requires planning, know-how, savings and an entrepreneurial spirit.
Starting a small business can be risky, but it is one of the most significant ways individuals have to create personal wealth.
Now you're armed with the information to create your investment plans. You now know:
But what if debt limits your ability to save and invest? The next chapter discusses controlling debt and building credit.
