Investing vs. Saving
A recent study by the Boston Consulting Group found that women tend to hold a greater percentage of their assets in traditional savings vehicles, aka cash investments, compared to their male counterparts. This is a sign that supports the theory that women tend to be less about investment performance and more concerned with the safety of their money for their future.
But the use of cash investments pretty much guarantees that no wealth gains will be made when considering taxes and inflation. This is a fact that has been true throughout modern history. Saving is an important first step in the wealth management process. After all, we need to save money before the choice of where to put it can be made. Considering a long-term investment plan for the part of your savings you don’t need in the near term is an important step in letting time and the compounding of investment returns help you achieve your goals. A wealth advisor can help in structuring a sound investment plan that meets your needs.
The First Step – Save!
Saving is the first important step in a wealth accumulation plan. As you earn money it is important to pay yourself first. Setting a target of saving 10 percent of your compensation each year is a great goal, especially when you are younger.
Albert Einstein famously said that compound interest or investment returns are the “8th wonder of the world”. It sounds boring and cliché, but starting the savings process early in life, even in moderate amounts, can lead to a fulfilling wealth plan. If you lack the discipline to set aside money out of each paycheck, consider an automatic savings plan using your employer’s payroll system (if offered) or an automatic bank draft from your checking account to a dedicated saving or investment account. After a few weeks, you won’t miss the money that’s being set aside for your future.
The Second Step – Invest!
Investing is a bit more complex than saving. More choices await, but there are still ways to keep it fairly simple. Let’s review a few easy ways to invest, whether you strike out on your own or if you choose to work with a wealth manager.
A great way to get started is through your employer’s retirement plan if they offer one, such as a 401(k). There are two advantages to using these plans. First, your contributions are deducted from your pay with pre-tax dollars, unless you choose the Roth 401(k) option. This means you will pay less federal and state income tax and fewer payroll taxes. Withdrawals later when you use these assets for retirement income are taxed but you’ll have more savings building wealth through your life and it is likely you’ll be in a lower income tax bracket in retirement than during your working years. There is nothing wrong with choosing the Roth 401(k) option or splitting your contribution between the traditional and Roth plan options. Roth 401(k)s build value tax-deferred through your life and withdrawals are tax-free in retirement. You just don’t get the tax deduction for making the contributions into the plan. Your wealth advisor can help you decide on the type of retirement plan to contribute to.
If you don’t have an employer-sponsored retirement plan available, or if you have the ability to save and invest more than you are contributing to the 401(k), considering a traditional or Roth IRA is the next step. Just like choosing the 401(k) option right for you, the choice is also available for IRAs but may be restricted based on your level of household income. Remember, the choice between the traditional and Roth IRA is the choice of when to receive your tax benefit. The traditional option gives you the tax break in the years you contribute the money and the Roth provides the benefit in retirement.
Along with saving in dedicated retirement vehicles like IRAs and 401(k)s, it pays to always have some money in a taxable investment account. These include bank accounts, online savings vehicles, and brokerage accounts. There are no tax benefits to putting savings in these accounts, but there are also no tax penalties for early withdrawal if you need to use some of your savings for a specific purpose, like a down payment on a home. Your wealth advisor will most likely suggest a balanced approach to directing your savings into different types of accounts to make sure you are ready to handle the critical financial events that life will bring your way, both good and bad.
All the types of investment accounts reviewed above will offer some combination of choice on investments you can use to get your contributions to work to build wealth. These are generally longer-term vehicles that may fluctuate in value in the short term but tend to grow at higher rates than cash-type savings vehicles over the long term. Examples include stocks, bonds, real estate and pooled investment vehicles, like mutual funds and exchange-traded funds that invest in those asset types.
A good financial plan will address both the short-term need for accessible savings and the more long-term investment planning. A plan also allows for smart decision-making when needed rather than guessing at what the right decision is. The wealth manager you select should be skilled in developing a holistic approach to planning and investing and be interested and thoughtful about your personal objectives so the plan can be tailored to yo
To find out more about working with a personal wealth advisor, call us at 941-778-1900 or schedule a complimentary introductory meeting here on our website.