Personal Investing

The content contained on or made available through this website is not intended to and does not constitute as legal or investment advice. Please use and refer to the information at your own risk, and consult with a professional before making any finance-related decisions. Refer to the full Terms & Conditions here. Last updated January 1st, 2020.

 

Takeaways

  1. Determine your savings goals and their respective timeframes

  2. Choose the investment vehicles that best match your needs

  3. Utilize tax-favored investment options whenever they are available

  4. Consider opening a brokerage account to invest in low-expense index funds

  5. Do not try to “beat” or “time” the market

 

In the majority of cases, saving for retirement should be prioritized. However, most retirement fund contributions will not be accessible until age 59.5. When the period for which you will be investing (time horizon) is shorter, other options may be more attractive. Below is a list and description of common non-retirement savings vehicles:

 

  • FDIC-Insured Savings and Checking Accounts: If setting aside money for short-term goals or setting up an emergency fund, FDIC-Insured savings and checking accounts are a great option. A High Yield Savings Account (HYSA) paired with a traditional checking account provides high liquidity and respectable returns (often in the range of 1% - 2% on HYSAs). Ideally, choose a bank or credit union that requires no annual fees, no minimum balances, and has a strong financial reputation.

  • FDIC-Insured Certificate of Deposit (CD): A CD is a little-to-no-risk investment option that trades some of the liquidity of a savings account for a slightly higher interest rate. For instance, a one-year $1,000 CD restricts your access to that money for the full one-year term. With most CDs, you are able to withdraw the cash early, but you will have to pay a early-withdrawal penalty. So, when does it make sense to purchase a CD instead of storing the money in a savings account? For the most part, if you know you will not need the money for the period of 6 months to a few years, purchasing a CD may be worthwhile given a high enough interest rate. Beyond that, it is often better to store money in the stock market, where it will average much higher returns than either a CD or savings account.

 

  • Taxable Brokerage Accounts: Companies like Vanguard, Fidelity, and Schwab offer a wide array of investment options. Money that is not needed for 5-10 years can be put to work in the stock or bond market. The easiest way to do so is to set up a taxable brokerage account and invest in index funds (one that represents the total U.S. stock market or all investment grade bonds, for instance). The stock market averages approximately 7% returns after inflation, with bonds averaging closer to 2-3%. Invest only when you have the excess capital, and avoid trying to “beat the market” through timing or individual stock selections. Be consistent and patient with your investments. Warren Buffet has been quoted saying: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” My advice: follow his advice.

 

  • Higher Education Funds: If the goal is to finance future educational expenses (e.g. college tuition for your children), there are investment vehicles that will help you do this with favorable tax implications. For instance, IRS Code Section 529 “Education Savings Plans” offer various tax incentives. While not Federal Income Tax deductible, as long as the invested funds are used for higher education (and up to $10,000 per child per year for private, public or religious elementary and secondary schools), they will grow and can be withdrawn tax-free. Many states allow tax credits or deductions for 529 contributions as well. The availability and nuances of 529 plans vary state-by-state, so be sure to thoroughly research this option before setting one up. Fees and expense ratios also vary significantly, depending on the broker. Check out sec.gov and investor.gov for more information.

 

  • Health Savings Account (HSA): If your employer offers a High Deductible Health Plan, there’s a good chance you have access to an HSA. Although not obvious at first, an HSA can be viewed as another form of tax-deferred investment. Money placed in an HSA (typically through Open Enrollment elections and employer contributions) can be invested pre-tax and grow over time. The earnings and principal can be used pay for qualified out of pocket medical expenses, free of tax. At age 65, you may withdraw money from an HSA for any reason without penalty; but you do pay income tax. For this reason, an HSA can double as a personal or retirement investment vehicle. Maximum contributions in 2019 are $3,500 for individuals and $7,000 for families.​

After prioritizing tax-friendly retirement accounts, the rest depends on your unique circumstances. If you have children and wish to save for their education, prioritize a 529. And if you have additional income that you do not believe you will need in the next 5-10 years, try setting up a taxable brokerage account with a company like Vanguard. The key here is to put money you do not currently need to work for you in the stock and bond market, in a tax-advantaged way whenever possible.

Conclusion

 

Wherever you decide to place your money, strongly consider where and when it will be needed next. Only use tax-deferred vehicles when you know that you will not be penalized for non-qualified withdraws, and only invest in a taxable brokerage fund with money that you do not plan on using for at least 5-10 years. 

The content contained on or made available through this website is not intended to and does not constitute as legal or investment advice. Please use and refer to the information at your own risk, and consult with a professional before making any finance-related decisions.

© 2020 London Levinson LLC