Building a balanced investment portfolio may sound like a daunting task. But with the abundance of helps, resources, and learning tools available today, this essential task does not have to be stressful. In fact, learning about investing can be fun, especially as you make your first investments, watch your savings grow and your worries shrink! Here are the six basic investment types you and your family should add to your investment repertoire.
The Most Important Investment
According to world-renowned author, financial and investment expert Dave Ramsey, the most important financial investment you can make on your family’s behalf is to build a highly liquid (i.e. readily accessible) emergency fund. Your initial fund goal can be as little as $1,000, but ideally you should aim to cover at least six months of basic expenses to keep food on the table, a roof over your head and your lights on in the event of an unanticipated emergency. Once you have your emergency fund in place, you should begin building the rest of your investment portfolio.
IRAs (individual retirement account)
If you work, you should investigate what options you may have to open an individual retirement account (IRA, 403b or 401K plan). Anyone with earned income can contribute to an IRA. A 403b is for employees of non-profits and finally according to the Wall Street Journal, “a 401(k) is a retirement savings plan sponsored by an employer.”
In the “traditional” form, each of these three types of programs have one thing in common, they let workers save and invest a piece of their paycheck before taxes are taken out but you pay taxes when the money is withdrawn. If available through an employer, opting in to this benefit may make you eligible for employer matching funds, and also lower your taxable net income by the amount you deposit into your IRA each year. The “Roth” form uses after-tax money but taxes aren’t due when the money is withdrawn from the account.
If you are self-employed you might need to find out how to set one of these up yourself through a third party investment firm.
College Savings Plans
Each state offers its own version of the 529 plan, a college savings plan that is tax advantaged. You can also open an ESA, or Coverdell Education Savings Account which is tax advantaged. Both types of accounts can help you save towards your children’s college education and reduce your annual taxable income by the amount invested.
Mutual Funds
Mutual funds are one of the most popular types of investments for individuals and families today. The reason for this is simple: you are able to limit the risk of investing into the stock of any one company or entity by purchasing shares in a mutual fund that includes stock from that entity as well as many other entities. There are mutual funds available at risk levels rated low to high. Some mutual funds are grouped together by industry type (such as energy) while others are grouped by risk level.
Long-Term Care Insurance
Long-term care insurance is a relatively new entrant into today’s investment portfolios. This is because today’s lifespans are measurably longer (by as much as 5 to 10 years) than they were just two decades ago. Long-term care insurance is a policy that will offer you health insurance coverage above and beyond what Medicare will provide should you need extended skilled nursing care in your golden years. Thus it can protect your other investments to ensure you don’t spend every penny you have saved on health care.
Life Insurance
Life insurance offers several options, from term (level or decreasing term) to whole life (cash value or permanent). Term life insurance pays only if you pass during the policy period, while whole life pays regardless. The type and amount of the life insurance policy you select should vary based on the value of other portfolio elements, your family’s needs should you pass unexpectedly and your overall investment savings goals. See: The Differences Between Term and Whole-Life Insurance
By understanding more about each of these six basic investment types, you can begin building a stable, responsible investment portfolio that will effectively provide for you and your family financially in the future.
Eileen O’Shanassy is a freelance writer and blogger based out of Flagstaff, AZ. She writes on a variety of topics and loves to research and write. She enjoys baking, biking, and kayaking. Check out her Twitter @eileenoshanassy. For information on taking your investments overseas or widening your portfolio, check out other investment options in Europe.