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Once you have completed your budget and listed your goals, your age also factors into the equation of how much to save or invest. Compounding, or growth due to reinvestment of returns, will result in a larger sum of money over time. Younger people have more time for money to grow in long-term investments before it is needed for objectives such as retirement. Older individuals may need to maximize the percentage of income invested to reach retirement or other financial goal, as they need to access funds sooner. Considering your budget, goals and age will guide your decision regarding allocations for saving and investing.
Before you begin investing for long term goals, work towards saving three to six months' worth of living expenses in an emergency fund. Safe, accessible accounts are best for savings. These accounts typically earn low interest rates, but can be withdrawn without penalty and are safe from the market fluctuations that can occur with stocks or mutual funds. Some institutions have developed certificates of deposit, or CDs, that allow early withdrawal without a penalty and earn higher rates than traditional savings accounts. Check the terms carefully before choosing a CD for your emergency fund to understand terms and penalties.
Invest in Ta- Advantaged Funds
Once you have accumulated an emergency fund, you are ready to start investing for your long-term goals. If you have the option
to invest in a 401k plan at work, employer matching and tax advantages make this a logical first choice for investing. Traditional or Roth IRAs are good alternatives if your employer does not offer a 401k, and, depending on your income, you may qualify for IRA investments in addition to a 401k. Be aware that withdrawing money before retirement from these funds may result in tax penalties, so only put money you don't need to access right away in these accounts.
Stocks and Mutual Funds
Investing in stocks, bonds, or mutual funds will provide potential for higher returns. However, these investments also have higher risk as well. Market fluctuations or poor business performance may temporarily or permanently reduce the value of your investments. Diversifying your portfolio so all of your money is not invested in a single stock helps counteract this risk. Mutual funds can provide a diversified portfolio for small investors; however, examine fund fees and potential tax consequences prior to investing.
A well planned saving and investment strategy will help you reach your financial goals. Saving will protect your financial well-being in case of a short-term set back. Investing will help you reach your long-term goals such as early retirement, buying your dream home or funding education for your children. Establishing goals and implementing a saving and investment plan will motivate you and your loved ones to save and invest money to meet your objectives.
Category: Personal Finance