Where to Invest Your Money in 2010
Smart investing tips for the new year and beyond.
This post is the third in our five-part series about taking charge of your finances in 2010. We talked about the importance of setting financial goals and saving money in the first two parts of the series. Today’s topic is about where to invest your money.
What is the Difference Between Saving and Investing?
Before we get started, I want to make a distinction between the terms saving and investing. We tend to use those words interchangeably, but they’re really not the same thing. The difference has to do with taking financial risk.
Saving is putting money aside without exposing it to any risk (or at least very little)–like in a savings account, a money market deposit account, or a certificate of deposit (CD) in an FDIC-insured institution.
Investing is committing money to an endeavor or account with the expectation that you’ll make a certain amount of profit or income. The risk is that you’ll receive less than what you expect. Or worse yet, there’s a possibility that you could lose your entire investment. Increased risk generally goes along with the potential to make more money.
Why You Need to Take Investment Risk
Therefore, taking calculated risk is an important part of your financial life. Without it, your money probably won’t grow fast enough to achieve your goals. You can keep money safe and cozy in a low-interest savings account, but that stunts its potential and doesn’t give it the opportunity to swell into a nest egg large enough to meet your long-term goals.
The quick and dirty tip for investing is to expose your money to just enough risk to accomplish your goals. The money you’ll need for small, short-term needs is well-suited for safe places like a savings account or CD. But the money that you’re counting on to grow and multiply over the long-term–like for your retirement–needs to get friendly with some amount of risk that you can live with.
Consider this: Many financial advisors believe that not taking enough investment risk might actually be the riskiest move of all! That’s because you could fall short of your goals or run out of money during retirement. Whether you avoid risk intentionally or have simply been procrastinating investing, the result could be devastating to your financial future.
Avoid Common Investing Mistakes
Don’t make the mistake of thinking you should put off investing until the market “improves”. Waiting to invest can cost you in the long-run because you’ll probably miss out on the market’s best days, which can significantly lower your overall returns. A good strategy is to use an automated plan so your investments are spread out evenly over the year.
Also, never think you should wait to invest until you have more money. Even if you only have a small amount to put aside, that’s okay. Contributing just $50 a week over 25 years with a 5% return would give you over $129,000. The saying time is money is the absolute truth when it comes to building wealth for your future.
Where Should You Invest Your Money?
If you’re like me, having enough to retire is probably your number one financial priority. So here are my three recommendations for where to invest this year:
Recommendation #1: Invest in a Workplace Retirement Account
Workplace retirement accounts include plans like 401ks, 403bs, and 457s. They offer nice tax advantages and are mandatory, in my opinion, if you also get company matching. A company match is when your employer invests a certain amount of money on your behalf when you invest your own money. Always contribute enough to max out a company match so you’ll get as much free money as possible. For 2010, the contribution limit that employees can put into most workplace plans is $16,500 or $22,000 if you’re 50 or older.
Employer-sponsored plans make investing really convenient because the funds are deducted from your paycheck before you even see it. The only downside to a workplace plan is that it may not offer a huge variety of investment choices. However, if you have more than 10 years before retirement, choosing a stock fund is generally a good choice for an optimal return on your investment.
Recommendation #2: Invest in an Individual Retirement Arrangement or IRA
IRAs are the second best place to invest. They’re the answer when you don’t have a workplace retirement plan or if you max out a workplace plan and still have more money to put away. IRAs offer great tax advantages with unlimited investment options, but you can’t invest as much in them as you can with a workplace plan. The IRA contribution limit for 2010 is $5,000 or $6,000 if you’re 50 or older.
You can open an IRA at brokerage offices, banks, or many online sites like etrade.com, zecco.com, or sharebuilder.com. At ShareBuilder you’re required to set up an automatic investment plan for recurring or one-time investments. If you set up a plan with them before January 31st you get 10 free trade credits which is a $40 value.
What is a Good IRA Investment?
A good IRA investment might be a target date exchange-traded fund (ETF). They’re called target date funds because you choose one that’s closest to the year when you plan to retire or access the money. For example, if you’re 35 years old and want to retire in 2040, you could choose the iShares S&P Target Date 2040 Index Fund which trades as symbol TZV. Target date funds are very convenient for many investors because they automatically rebalance on a periodic basis to achieve growth in the early years and capital preservation as you approach retirement.
Recommendation #3: Invest in a Taxable Brokerage Account
The third best investment option is a taxable brokerage account. You can open one with brokerage companies or online sites like the ones I previously mentioned. Consider making taxable investments only after you’ve maxed out contributions to your workplace plan or IRA.
Quick and Dirty Tip: Invest Early
The most important point to take away from this article is that you should start investing early and consistently. Investing less money sooner, rather than more money later, is the secret to investment success. Investors who start late usually have to make huge financial sacrifices to accumulate enough money to reach their goals.
Invest More This Year
If you have a workplace plan, consider increasing your contribution by one percent. Ask your benefits administrator for the form to sign up or to increase your current contribution. If your best investment option is an IRA, get it set up for a recurring electronic deposit from another account. Find the grit and determination to always invest at least 10% of your income. I want to challenge you to stay ahead of the financial game by investing more this year.
Again, this post is the third in our five-part series about taking charge of your finances in 2010. Each article in the series is about a pillar of personal finance—setting goals, saving, investing, being properly insured, and reducing your taxes. Please click on the links to head over to the other episodes.
And, please, get more advice on investing with my Quick and Dirty Tips compatriot, The Winning Investor.
Money Girl Contact Info
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More Resources:
IRA Contributions: Deductions And Tax Credits
Money Girl Guest Post on We The Savers
Where to Investimage courtesy of Shutterstock
About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.
