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What Should You Be Doing with Your Investments?
Uncertain times bring, well, uncertainty, and that extends to your finances. The market is unpredictable, tensions are high, and financial advice seems to be flying everywhere, sometimes contradicting itself.
If you’re not sure what to do with your investments right now, or if you should be doing anything at all, we have you covered with some tips and ideas for helping your investments stretch as far as they can.
Take stock (no pun intended)
Before you decide to even look into making changes with your investments, you need to ask yourself why you are doing it. Is it because you’re worried about your employment status? Are you afraid that you won’t be able to make changes later as a result of the coronavirus? Taking the time to understand why you want to make these decisions is important, because you don’t want to let fear drive your financial choices. Make sure your reasons are sound before taking any further steps.
Make a goal
You might be new to the world of investments, and you followed the advice of your accountant to the letter without taking a lot of time to consider your options. It’s always a good idea to consult with an expert, but you also need to make sure you have a goal in mind for every financial aspect of your life, including your investments. Creating a “financial road map” will allow you to make informed decisions that are designed to benefit you in the long run.
Keep it diverse
Whether you are in the middle of a pandemic or it’s just another Taco Tuesday, financial experts agree that keeping your investments spread out over different categories can be beneficial in protecting your funds from changes in the market.
If you feel your investments are not diversified enough, contact your accountant to talk about your options. Again, this is not a message to panic and change everything because you think your portfolio is not diverse enough. Review your current plans and other options before making any changes.
Don’t panic sell
There are a lot of scary predictions out there right now for financial futures – everyone keeps hearing about the current financial crisis and how dire it is. While we would never advise you to ignore those warnings, it’s also imperative that you keep the big picture in mind when making decisions. Yes, times are currently rough for the economy – but that won’t always be the case. Don’t make rash decisions now that will affect you negatively in the future.
Leave your 401(k) out of it
It is very tempting to borrow money from your 401(k), especially if finances are tight. There are certain situations where the benefit outweighs the risk in this scenario, but they are few and far between.
Consider all of your options carefully before taking any steps in this direction. In the meantime, experts also suggest continuing your contributions toward your 401(k) – at the very least, contribute as much as your company will match. Remember, this current financial crisis will end, and your retirement will be waiting for you when it does.
Consult the experts
Don’t have an accountant? That’s okay. Odds are high that you know someone who does and can connect you for some basic questions. If that doesn’t work for you, do what the rest of us do and consult the all-knowing internet. Be mindful of your sources – you want to make sure that any blogs or websites you find are the real deal. But once you discover the right advice from the right expert, it will be easy to apply it to your own investments. Time Magazine compiled a list to get you started. Happy reading!
Don’t make choices based on the future
While it’s true that experts can make educated guesses when it comes to the financial health of the country, at the end of the day, there are many factors that could change your personal situation. We don’t say that to scare or discourage you; rather, it is vital that you not place all of your eggs in one basket, so to speak, when it comes to making financial decisions based on the future.
One expert may say the economy will recover in six months; another may say it will take ten years. Take your time, do your research, and make educated decisions based on facts and figures.
No one likes to make hard financial decisions during an economic downturn, but you can protect yourself from doing more harm than good with just a little research and understanding. Set aside some time to review your investments, adjust only where needed, and ride out the financial storm to where your smart planning is waiting on the other side.
Five mistakes not to make when transferring a 401(k)
You may be worried about transferring your 401(k) – or you may be worried because all you know about 401(k)s is what you’ve learned from characters on sitcoms. Whatever level of expertise you have, it’s about to get a whole lot higher after you read our best tips for avoiding common mistakes when it comes to protecting your future.
Don’t fake it ‘til you make it
If you’re at a wedding and can’t remember a cousin’s name, it is perfectly acceptable to refer to them in vague terms until your spouse can whisper the name to you. But when it comes to your financial security, you’ll want to understand every detail. If you’re not sure about how your 401(k) works through your current job, or even if you’re not sure that you are currently enrolled in a 401(k), now is the time to ask! Better late than never, right?
Don’t be afraid to ask a lot of questions
Yes, you may feel like the world’s most annoying gnat when you sit down with your HR rep and discuss your 401(k) options and ask question after question. But asking questions is how you learn – and in your retirement years, you will be glad that you risked being banned from the HR hallway forever to ask just one more question and increase your financial knowledge.
Don’t forget to consult an expert
Hiring an accountant or tax professional isn’t always necessary, but it certainly helps you navigate your options and decide which path is the best one to take to secure your comfortable retirement. If you don’t want to use an accountant for all your financial needs, consider consulting one to help you transfer your 401(k) and guide you through the necessary steps.
Don’t skip the details
Did you know that you have 60 days to finalize your 401(k) transfer into a new account? That is just one example of the many rules and regulations that come with managing and transferring a 401(k). It is crucial that you know and understand the necessary steps in order to avoid penalties – like losing over 50% of your 401(k). Even if you are consulting an expert, do your own research to ensure that every last detail is covered.
Don’t think you can’t learn more
Once you have successfully transferred your 401(k), you deserve a pat on the back. However, that doesn’t mean you’re done managing this account! It’s important to stay up to date on trends and recommendations to keep your funds secure, along with making regular checks to ensure that the amount you think you have matches the official record. You don’t have to become an expert yourself, but keeping up with these small details can make a big difference.
A few more suggestions for 401(k) success:
- Take a class or look for webinars on the best ways to maximize your 401(k).
- Speak with trusted family members or friends to find out tips and tricks they have learned through maintaining their own 401(k).
- Ask your HR rep if there is anything additional they would recommend to facilitate a successful transfer.
- Remember that all final decisions are up to you – if a recommended step does not seem like a good fit, even after a lot of research, you don’t have to take it.
- Join a Facebook group, set up a Google alert, or find a Twitter account that has the expertise you need to allow you to stay current on any relevant information.
Your future is important – which means your 401(k) is a priority for you. Take the necessary time to ensure that you are doing everything you can to make your 401(k) transfer a complete success. And, remember: it’s always the right time to consult an expert!
What the Coronavirus Could Mean for Your Money
Among the many concerns that COVID-19, or coronavirus, has brought to Americans and people worldwide is that of finances.
With school systems shutting down and some states even enacting a state-wide policy that allows only certain businesses to operate during certain hours, those who are still able to go to work may be wondering what they should expect as far as their paychecks – while those who have already been called out of work are wondering how to stretch their paychecks as far as they can. Read on for information on what the biggest concerns are, and how you can combat them.
Overall financial concerns
There is good and bad news here. You’ve seen the stock market took a hit. Bad news. But as a result, the Federal Reserve is taking extra steps to keep the economy afloat as everyone tries to predict how long this crisis will change our daily lives, such as lowering interest rates for student loans and home loans. Good news.
Financial experts are all saying the same thing: Don’t panic-sell anything! Now is not the time to throw years of investments and planning away because things seem so dire right now. Eventually, this crisis will pass – and you will need your investments when it does.
Adapt to change
When changes like this occur, it’s smart to evaluate and take a fresh look at your budget. For instance, you may be working from home right now – but that means you are using way less gas than usual. Your grocery fund will go up, but your school activities will be at a standstill. Reallocate your funds as needed to get you through the next few weeks.
Stretch it out
This isn’t a comment on your time at the gym (please don’t go to the gym). You can find creative ways to stretch your dollars even beyond their usual point. Turn the week’s leftovers into a meal all its own. Buy off-brands instead of your usual store brand for groceries. If you can work from home outside of your typical job description (i.e., help the front desk send emails, do some digital filing, etc.), take the hours that you can so you can keep some cash flow coming.
Cut it out
How many digital streaming services do you have? Probably more than one – so why not stop subscribing to some of them for now? We know that having your kids home with no Netflix may sound like the worst idea ever, but split the difference and keep the one service your family uses most. Also consider reducing the level of service you purchase to save a few bucks.
Refinance student loans
Remember what we said about interest loans being reduced? Since you have a lot of extra time at home right now, why not look into refinancing your student loans to see if you qualify for a lower interest rate? That may not change your immediate situations, but it will certainly be useful down the line when we all return to our usual routines.
Save for emergencies
Again, we realize that you may be scraping by while things are uncertain. But as soon as you’re able, go ahead and start an emergency fund. A good rule of thumb is to have three months of your salary stashed away. But you can start small. That change from the gas station? Drop it in a jar. The next time you find a $10 bill in your wallet, put it aside. A little here and there will mean big changes later on.
No one can predict the future – but you don’t have to let it control your finances. Spend wisely, save daily, and remember that this is temporary.
How compound interest can change your life–really!
Nobel Prize winner and renowned physicist Albert Einstein is rumored to have called compound interest the eighth wonder of the world. Regardless of whether he said it or not, it might actually be true, at least in the mathematical world. Compound interest is a powerful income-generating, wealth-building tool that can substantially impact your financial future.
If you don’t know what compounding interest is, or better yet, how it works, don’t worry—you’re in good company. According to ValuePenguin, who asked 2,000 Americans if they could accurately define some financial terms like net worth, credit score, and compound interest, nearly 70 percent of Americans had to ask Siri for help. Let’s see if we can fix that.
Simple vs. compound interest
There are two different types of interest: simple and compound. Simple interest is interest earned on only the principal amount of your investment. Consider a certificate of deposit (CD), for example. At the end of the term, you’ll receive your initial investment amount plus a fixed amount of interest.
Compound interest, on the other hand, is interest earned on interest, and it’s the quickest way to bump up your balance. Each period’s interest (daily, monthly, quarterly, or annually) is earned on the initial amount of your investment plus all the previously accumulated interest.
Here’s an example:
If you invest $10,000 at 7% simple interest, $700 in interest will be added to your account after Year 1. In Year 2, another $700 in interest will be paid to your account… and again in Year 3, Year 4, and so on. As long as the interest rate remains the same, you can count on earning the same $700 amount year after year.
If your $10,000 investment paid 7% compound interest, you’d see the same $700 interest in your account after the first year. However, in Year 2, your interest will be calculated on the new balance of $10,700, not your original investment of $10,000. The interest payment for Year 2 will be $749, which is then added to the $10,700 in order to calculate the interest for Year 3, and so on.
The effect of compound interest is extraordinary. At 7% simple interest, your $10,000 investment would be worth $27,500 after 25 years. With compound interest, the value would have grown to more than $50,000. It’s easy to see which one puts your money to work, and makes the biggest difference.
Invest sooner than later
You don’t need to be a mathematical whiz to benefit from compounding interest.
When you’re saving or investing money, compound interest will continually give you a financial boost. The more time your investment has to run the cycle of earning interest, adding it to the investment balance, and then earning interest on the new balance, the better. Want to see how much a specific investment amount could grow with compound interest? Check out this compound interest calculator.
Put your money to work
Compound interest works the same way, regardless of the amount of money you invest, and it adds up faster than you think. At 6 percent compound interest, your money should double in about 12 years and be worth four times as much in 24 years–that’s the Rule of 72. Simply take the interest rate and divide it into the number 72, which will estimate the number of years it will take for your money to double in any one investment.
Compounding interest can be an important component of your overall financial strategy. It’s ideal for investors with longer time horizons, but it also works for investors who’ve gotten a late start saving for their future. Whatever your situation, don’t wait another day. Put your money to work now and take advantage of the power of compounding.
Four things to think about if you’re ready to start investing
Saving and investing are two of the best ways to build wealth. For many people, though, the leap from saving to investing is a big one. In fact, a recent survey commissioned by Ally Financial reported that 70% of Americans age 18 to 39 know they need to become more financially secure, but don’t know how to go about getting there.
If you’re saving, you’ve already taken the first and most important step. But, we know that investing can be intimidating, especially if you don’t know where to start. Keep in mind that accumulating wealth is a gradual process and not something that happens overnight.
It can be, however, virtually painless and help create additional funds for retirement, recreation, education, or whatever other investment goals you have. It can help you start a business, send your kids to college, buy a beach house, travel around the world, or spend more quality time with your grandchildren.
Need more concrete encouragement? $1,000 invested at the stock market’s historical return rate for 20 years would grow to almost $6,000. Apply that to 30 years, and it would leap to $15,000. Now, with every investment, you assume some level of risk, and past performance doesn’t guarantee future performance, but you can see the possibilities.
If you’re ready to start investing, here are some steps that will help you identify the most appropriate products and investments to help you reach your financial goals.
Determine your investment goal
What financial goals do you want to achieve by investing? It may be to simply start accumulating wealth, or you may have a specific goal in mind. It could be to buy a home, pay for a wedding, go on a vacation, or fund your child’s education. Goal-based investing is a process that helps ensure that you have enough money when you plan to spend it in the future. It impacts the type of investments you might choose and whether their strategy is growth, income or stability focused.
Determine your investment budget
Regular and systematic investing is the easiest way to invest your hard earned dollars. That means that a percentage of your income is automatically invested into an account every month. It effectively allows you to leverage the long-term benefits of dollar-cost averaging (DCA) and helps to better manage short-term investment volatility.
Creating a monthly budget and earmarking funds for investment helps separate them from your spending dollars. When you “pay yourself first” by treating your investment account as an expense, you’re more likely to make smarter financial decisions with your remaining monthly funds. And, it helps ensure you stay on track with your investment plan.
Determine your risk tolerance
Every investment comes with some level of risk and generally, the more risk, the greater the potential return. It’s pretty safe to say that most people want to make money as quickly as possible, but if your risk tolerance isn’t up for the challenge, the anxiety it brings will never be worth the chance of realizing the reward.
Be honest about the amount of risk you’re comfortable assuming. Most investment plans are designed for long-term growth. If you’re checking your account balance on a daily basis and you’re riding a rollercoaster of emotional highs and lows as a result, your investments are not in line with your risk tolerance. Investing doesn’t have to be scary. There are options for every type of investor.
Determine your time horizon
Your time horizon is the amount of time you have until you need to withdraw your funds. With a long time horizon, you can afford the privilege of slow and steady gains that limit your risk. For example, if you begin saving for retirement at age 20, you have 45 years to weather the ups and downs of the market. If you begin at age 35, you’ve lost 15 years of compounding growth and need to earn more money in less time, which, to accumulate the same amount, might entail more risk. If you begin saving for your child’s college education when they’re born, you have a lot more time than starting when they turn 10. To offset a short time horizon, you can consider increasing your investment dollar amount or possibly assuming more risk for the chance of a higher potential reward.
Most investors begin with a company-sponsored retirement plan or an IRA. There are typically a limited number of investment options and the plans generally lean toward conservative investing, although there are exceptions.
If you’re new to investing, don’t rule out the help of a financial advisor. You don’t have to be a financial guru, especially when you’re smart enough to leverage the expertise around you. They can help you sort through some of the ideas above and work with you to establish a solid financial plan for your future.
What is a financial advisor and do I really need one?
Some think that only wealthy people need financial advisors. Whether it’s a financial planner, wealth manager, money manager, retirement planner, or a slew of other similar titles, they generally all mean the same thing: financial guidance for people who want a strategy to achieve some future monetary goal.
Planning for life events
Eventually, we all experience some big life event, whether it’s paying for college, or buying a home, starting your own business, or caring for aging parents. Often times, your financial goals can overlap, collide, or simply seem unmanageable. A financial advisor will not only help you navigate the journey, but they’ll also work with you to prioritize your efforts. Sometimes you just need a more structured savings and investment strategy that can lead you to a more comfortable and less overwhelmed mindset.
Maximizing your current assets
Sometimes the help of a financial advisor is about managing the funds you already have. Many people use an advisor’s expertise to invest their savings and maximize the opportunity to put their money to work. They can help manage an investor’s tax liability, too. A financial advisor that specializes in tax-deferred investment vehicles can help you determine the most advantageous time to take a distribution from your retirement plan or identify beneficial tax-sheltered options.
Regardless of intellect, an investor may lack the appropriate knowledge when it comes to choosing investment options. Trying to balance the relationship between risk and return with your time horizon and your financial goals can be tricky. A smart investor seeks out and leverages the guidance of experts, even if they have investment experience. Don’t ever underestimate the value of professional advice.
Getting back on financial track
For some, their finances are one step away from crashing and burning. If you’re struggling with debt, a consolidation plan might be a wise first step. Financial advisors can develop a plan–not a get rich quick fix–where you’ll learn discipline, recognize your spending habits, and be held accountable so you can move toward improved financial health.
When you work through your goals with an advisor that has in-depth knowledge of your financial situation, you’re able to create realistic expectations and learn to plan accordingly. Recommending appropriate investment vehicles and a savings strategy can help guide you through the uncertainty.
While some advisors require a long-term arrangement, there are many who offer free consultations and no-obligation appointments to review your financial plan–or lack thereof. Check out the services offered by your local bank or credit union and set up a meeting. If they don’t give you a gold star and a pat on the back, they’ll be sure to recommend a realistic strategy. Either way, you win!