A Health Savings Account (HSA) is a convenient way to store funds specifically for medical expenses. If you qualify for an HSA, you will get to enjoy a few tax advantages as well. While this might sound like an ideal setup, not everyone is eligible for a health savings account. To qualify for a health savings account, you must be enrolled in a high-deductible health insurance plan (HDHP). The details of these plans are revised every year by the Internal Service Revenue (IRS), which sets the bar for:
The minimum deductible a plan must have to be considered a HDHP.
The maximum amount that a customer who purchases a plan is able to spend out-of-pocket.
The benefits of a health savings account
Here are some of the key advantages of having a health savings account:
It covers a large variety of medical expenses: There are many different kinds of medical expenses that are eligible, such as medical, dental and mental health services.
Pretty much anyone can make contributions: Contributions to your health savings account donât have to be made by you or your spouse. Employers, relatives, friends or anyone who would like to contribute to your account can do so. There are limits, however. For example, in 2019, the limit for individuals was $3,500 and $7,000 for families.
Pre-tax contributions: Since contributions are generally made at your employer pre-taxes, they are not considered to be part of your gross income and are not federally taxed. This is usually the same case when it comes to state level taxes as well.
After-tax contributions are tax-deductible: Any contributions made after taxes are deductible from your gross income on your tax return. Doing so minimizes the amount you would owe on taxes for that year.
Tax-free withdrawals: You can withdrawal money from your account for approved health care costs without having to worry about federal taxes. Most states do not tax, either.
Annual rollover: Any unused HSA funds that are left over by the end of the year get rolled over to the following year.
Portability: Even if you change health insurance plans, employers, or retire, the money in your health savings account will continue to be available for qualifying health care expenses.
Having a health savings account is convenient: Most of the time, you will receive a debit card that is connected to your health savings account. This way, you can use your debit card to start paying for eligible expenses and prescription drugs on the spot.
The drawbacks to having a health savings account
While there are many advantages to having a health savings account, there are a few things to consider. For one, in order to qualify for an HSA, you must hold a high-deductible health insurance plan. The tax benefits might entice you to purposely sign up for insurance coverage under one of these health plans but think before doing this. Here are some of the disadvantages to having a health savings account:
The High-Deductible Health Plan: These types of health plans can end up being a lot more expensive in the long run, even with an HSA. If you have other options for health insurance that offer lower deductible, definitely consider those and donât only choose a High-Deductible plan so that you can open an HSA.
You need to stay on top of your spending: If you have an HSA, you need to be willing to hold yourself responsible for recordkeeping. Keep track of all of your receipts so that you can prove you spent your HSA funds on eligible expenses.
Taxes and penalties: Using money from your HSA on other expenses that do not qualify as eligible health care expenses could result in you owing taxes. If you do this before the age of 65, you will have to pay taxes with a 20% penalty tacked on. If you are 65 or older, you will be responsible for paying taxes, but the penalty gets waived.
Fees: Sometimes, health savings accounts will charge additional fees, either per month or per transaction. Check with your HSA institution for more information on extra fees.
How an HSA works
In many cases, if your employer offers high-deductible health plans, they probably offer health savings accounts as well. Talk to your employer to find out what they offer. If your employer doesnât offer HSAs, then you can sign up for a separate one through a different institution.
You get to decide how much you would like to contribute to your HSA annually, but keep in mind that you cannot exceed the HSA contribution limit. Once you are set up with an account, you will either receive a debit card or a series of checks that are linked to your HSA. Right away, you will be able to use the funds in your account for:
Deductibles
Copays
Coinsurance
Other eligible health care expenses that your insurance does not cover.
Generally, you cannot use HSA funds to pay your insurance premiums. HSAs are not the same as flexible spending accounts, because HSAs rollover. Once you turn 65, you are no longer eligible to make contributions to your account, but you can still use the available funds for eligible out-of-pocket expenses. If you use the funds for non-eligible expenses, you will owe taxes on these amounts.
Investment Opportunities
Another benefit of HSA that you may or may not have heard of is that you can invest the money in mutual funds and stocks. If this is something that you are interested in, seek advice from a financial advisor for more information.
What is a Health Savings Account (HSA)? is a post from Pocket Your Dollars.
Getting started on retirement saving can be daunting when there are so many confusing options. There are thousands of stocks, not to mention other complex-sounding things to buy: bonds, mutual funds, exchange-traded funds, futures. And when you start reading about them, you’re liable to run into an impenetrable wall of investment jargon. So do you go it alone, taking shots in the dark with your…
With a brand new PhD under her belt, our latest Mint audit recruit, Renee, is ready to take on the real world with gusto. The 34-year-old is eager to buy a home and ramp up her retirement savings. She currently lives in San Francisco and has just started a full-time earning $87,000 a year (before taxes).
Renee also received a sizeable inheritance, totaling about $200,000 of which she used $30,000 to pay off her student loans.
So, why does Renee want an audit, exactly? Her finances seem perfectly in order, it seems.
As Renee explains, she wants advice around the best ways to plan for big goals like home ownership and retirement. âIâm especially eager to buy my own apartment, but it is extremely daunting (and expensive) in the Bay area,â she says. As a result, sheâs leaning to move to New York City (Brooklyn, specifically, where she thinks may offer more bang for her buck in some neighborhoods.)
She wants to know how much of a down payment she can reasonably afford and how to budget for monthly housing costs.
First, though, I wanted to learn more about Reneeâs finances. Hereâs what the quick audit revealed:
Retirement savings: $40,000 in a 403(b) and Roth IRA. She allocates $200 month from her paycheck to the 403(b).
Rent: $1,850 per month
Groceries: $400 per month
Where is all that savings parked? $100,000 in index and mutual funds, another $50,000 in an 11-month CD earning 1.5%, and remaining $20,000 in checking.
My Adviceâ¦
Play Retirement Catch-Up
For a 35-year-old worker, one rule of thumb is that you should have an amount equal to your salary in retirement savings. For Renee, who is nearing age 35, that means $80,000 to $90,000. Sheâs only about halfway there, so my recommendation is to play some retirement catch up. While itâs not realistic to think that she can invest another $40,000 this year, she can do better.
For starters, what about taking advantage of her companyâs 403(b) match? She believes her company offers one, but wasnât sure about the details. I suggested she learn the specifics and try to capitalize on that offer by contributing at least enough to earn the full match. Allocating closer to 10% of her salary would be ideal. (And PS. that contribution is tax deductible!)
Worried that this would stretch her paycheck too thin, I reminded Renee that she can always adjust her retirement contributions each month, but urged her to give it a try. (My bet is that it wonât be as painful as she suspects.)
Pad the Rainy Day Account?
I wasnât sure how far her $20,000 in checking would last her. She said it would be about a 6-month reserve, which I feel is adequate. No need to make adjustments there. One thought: She may want to move that $20,000 to a savings account thatâs a little less accessible (like an online account without a debit card), so that she isnât tempted to cash it out on a whim.
Protect Your Down Payment
Renee has $100,000 in a brokerage account, which she plans to use towards a down payment in the near future. But hereâs something to consider: What if the market plunges six months before you want to make a bid for a home? And you suddenly lose 15 or 20% of your investments? It would take time to recover, more time than you want.
I would personally never risk money in the stock market if I anticipated needing that money in the next five years. And according to Renee, she hopes to buy a home in the next two years. My advice: Protect the down payment from market fluctuations by moving 50% of that money over to a short-term CD and with the other $50,000 sheâs got saved in an 11-month CD, use all that savings towards a future down payment.
Know How Much House You Can Really Afford
To buy in NYC or San Francisco, a 20% down payment is standard. With $100,000 to put down, that means that sheâs looking at homes valued at around $500,000. With todayâs current mortgage rates nearing 4% for a 30-year fixed-rate mortgage, sheâs looking at close to $2,000 a month in payments. But weâve yet to get to taxes, maintenance and home insurance.
Instead, consider a starter apartment, a studio or junior one-bedroom closer to $400,000. A 20% down payment would be $80,000, leaving her with another $20,000 for closing costs. Her monthly payments would come to around $1,500 per month, close to 30% of her take-home pay, which is a smart cap for housing payments.
Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note âMint Blogâ in the subject line).
Farnoosh Torabi is Americaâs leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, sheâs become our favorite go-to money expert and friend.
The post Mint Money Audit: Affording Life After Grad School appeared first on MintLife Blog.
Saving money in a place like a money market account can assure that the money will be there safely when you need it. A money market account is an alternative to savings account, and usually pays more interest rate than a savings account.
See, Money Market Vs. Savings Accounts: What’s The Difference.
Overall, money market accounts are worth it, especially if you’re saving for a short-term goal. However, like any investments, there are some disadvantages to money market accounts.
In this article we will address three main things: what is a money market account and what are the advantages and disadvantages of money market accounts.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
What is a money market account?
Before we get to the advantages and disadvantages of money market accounts, it’s best to define what a money market account is.
A money market account is an interest bearing account that you can open at a bank or credit union. It is more like a savings account, though there are some key differences.
Money Market Accounts Advantages and Disadvantages.
Advantages
Let us consider the advantages of money market accounts.
Interest rate: The main benefit of a money market account is that the interest rate is much higher than that of a regular savings account. For example, CIT bank offers a money market account with 1.00% APY. Whereas the interest rate for a typical savings account is anywhere around 0.10%. MMAs interest rates are similar to those of certificate of deposits. The main difference, however, with a CD you earn a fixed interest for a fixed amount of time. And CD rates are higher than MMAs. And a penalty may apply if you withdraw your money early.
FDIC Insured. One of the benefits of money market accounts is that they are FDIC insured. Your money is secured by the federal government of up to $250,000. If you have more money than that, then you will need to open another account so all of your money can be protected.
To recap, money market accounts are FDIC insured, they offer higher interest rates than savings accounts, and they permit check writing privileges. Despite these many advantages, money markets also have disadvantages.
What are the disadvantages of a money market account?
Minimum balance: Most money market accounts require a minimum deposit account of $1,000. Although, that’s not a big amount, it may not be feasible for a young saver. Plus, a penalty will apply if your balance falls below the minimum requirement.
Limited check writing: While MMAs offer check writing privileges, there is a limit. With a money market account, you can only write six checks per month against your balance, which can be a disadvantage if you pay a lot of bills every month. So, money market accounts are a disadvantage for those who need to write more than six checks per month.
Account fees: Another disadvantage of money market accounts is the fee. If you donât maintain the required minimum balance, a fee will apply. So, maintaining the minimum balance is important because any fee will eat out your interest or earnings.
Taxes: Taxes are another disadvantage of money market accounts. You will pay taxes on whatever interest you earn in a MMA.
Inflation: just like taxes and account fees can reduce your interest, inflation can do the same thing. Let’s suppose you generate a 3% return on your money market account per year, and the inflation is 4%. That can impact your total return significantly.
Best Money Market Accounts
CIT Bank Money Market Account
The CIT Bank money market account is one of the best ones out there. Currently, the money market account offers a 1.0% APY.
This is very competitive comparing to other MMAs. Moreover, CIT Bankâs MMA has a required account minimum of only $100.
Open a CIT Bank Money Market Account.
Bottom line:
While money market accounts offer several benefits, there are disadvantages as well. The main disadvantages are that the minimum balance can be high for a young investor. Moreover, taxes and account fees can eat away whatever interest you might earn.
Related:
7 Best Short-Term Bonds to Buy in 2020
Vanguard CD Rates: How Much Can You Earn
Grow Your Money: Mutual Funds & CDs
Speak with the Right Financial Advisor
If you have questions about your finances, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
The post Advantages And Disadvantages of Money Market Accounts appeared first on GrowthRapidly.
For investors with short-term saving goals, short-term bonds can be appropriate investments for your money.
They are stable and they certainly provide a higher return than a money market fund.
Get Matched With 3 Fiduciary Financial Advisors
Managing your finances can be overwhelming. We recommend speaking with a financial advisor. The SmartAssetâs free matching tool will pair you with up to 3 financial advisors in your area.
Hereâs how it works:
1. Answer these few easy questions about your current financial situation
2. In just under one minute, the tool will match you with up to three financial advisors based on your need.
3. Review the financial advisors profiles, interview them either by phone or in person, and choose the one that suits yourâ needs.
Get Started Now>>>
However, even with the best short term bond funds, there’s also a risk of losing a percent or two in principal value if interest rates rise.
There are many options available to you, but your best option is to invest in taxable short-term bond funds, U.S. Treasury short-term bond funds and federally tax-free bond funds.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
What are short-term bonds?
Short-term bonds, or any bonds for that matter, are debts instruments that companies and the government issue. They typically mature in 1 to 3 years.
When you buy a bond, you are essentially lending money to the issuing company or government agency.
They are obligated to pay back the full purchase price at a particular time, which is called the “maturity date.”
Short-term bonds are low risk investments and you can have access to your money fairly quickly.
As with all bond funds, one of the risk of short term bond funds is that when interest rates rise, the prices of the bonds in the fund decrease.
But short term bond funds have a reduced risk of default, because the bond funds are backed by the full faith and credit of the U.S. government.
Moreover, because the term is short, you will earn less money on it than on an immediate-term or long term bond fund.
Nonetheless, they are still competitive and produce higher returns than money market funds, Certificate of Deposits (CDs), and banks savings accounts. And short-term bonds are more stable in value than stocks.
At a minimum, don’t buy a short-term bond fund if you’re saving for retirement or if you want to hold your money longer.
If you’re looking to invest your money for the long term and are still looking for safety, consider investing in Vanguard index funds.
CIT Savings Builder – Earn 0.85% APY. Here’s how it works: Make at least a $100 minimum deposit every month. Or Maintain a minimum balance of $25k. Member FDIC. Click Here to Learn More.
Short-term bonds: why do you need to invest in them?
You should invest in short-bonds if you intend to use the money in a few years or so. However, don’t push your emergency cash into bonds. That is what a bank savings account is for.
Also, you should not put too much of your long term investment money into bonds, either. If you have a long term goal for your money, it’s best to invest in mutual funds such as Vanguard mutual funds, real estate, or your own business.
Here are some situations where you should invest in short term bonds.
You want to stabilize your investment portfolio. If you have other aggressive investments, you may need to balance it out with short term bond funds. The reason is because short term bonds are safer comparing to stocks.
Buying a house.
Retirement. If you’re thinking of retiring in a few years, short-term bonds are appropriate.
Purchasing a car.
You’re a conservative investor. Not all investors can stomach the risk of losing all of their money due to the market volatility. So instead of investing in stocks, which falls on the riskier end of the securities spectrum, you should invest in short term bond funds.
Best short-term bond funds to consider:
Most people prefer to buy bonds through a broker such as Vanguard or Fidelity.
If you’re looking for the best short-term bond funds to buy now, consider these options:
Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX)
Vanguard Limited-Term Tax Exempt Fund Investor Shares (VMLTX)
The Fidelity Short Term Bond Fund (FSHBX)
Vanguard Short-Term Tax-Exempt Fund Investor Share (VWSTX)
Vanguard Short-Term Investment Grade fund (VFSTX)
T. Rowe Price Short-Term Bond Fund (PRWBX)
Vanguard Short-Term Bond Index Fund (VBIRX)
Tax free short-term bonds
There are some short-term bond funds that are both state and federally tax free. But there are not too many out there.
However, the ones that are available are good investments. So, if you are in a low state bracket and in a high federal bracket, consider investing in these Vanguard bond funds.These are federally tax free bond funds:
Vanguard Limited-Term Tax Exempt Fund Investor Shares (VMLTX)
This Vanguard bond fund seeks to provide investors current income exempt from federal taxes. The fund invests in high-quality short-term municipal bonds.
This bond fund has a maturity of 2 years. So, if you are looking for a fund that provides modest income and is federal tax-exempt, the Vanguard Limited-Term Tax Exempt Fund is for you.
The fund has an expense ratio of 0.17% and a minimum investment of $3,000. This makes it one of the best short term bonds to buy.
Vanguard Short-Term Tax-Exempt Fund Investor Share (VWSTX)
Like the Vanguard Limited Short Term fund, this fund also provides investors with current income that is exempt from federal income taxes.
The majority of the fund invests in municipal bonds in the top three credit ratings categories. It also invests in medium grade quality bonds.
This fund too has an expense ratio of 0.17% and a minimum investment of $3,000, making it one of the best short term bond funds.
U.S Treasury Short-term Bond Funds: Vanguard Short-Term Treasury
If you’re interested in a bond fund that invests in U.S. Treasuries, then U.S.Treasury bond funds are a great choice for you. One of the best U.S.Treasury bond funds is the Vanguard Short-Term Treasury.
This bond fund seeks to track the performance of the Bloomberg Barclays US Treasury 1-3 Year Bond Index. The Vanguard Short-Term Treasury invests in fixed income securities with a maturity between 1 to 3 years.
This bond fund has an expense ratio of 0.07% and an initial minimum investment of $3,000. Currently, this short term bond fund has a 1-year yield of 4.51%, making it one of the best short term bond funds.
Of note, this fund is also available as an ETF, starting at the price of one share.
The Fidelity Short-Term Bond Fund (FSHBX)
The Fidelity Short Term Bond Fund is one of the best out there for those investors who want to preserve their capital. This fund was established in March of 1986 and seeks to provides investors with current income.
The fund managers invests in corporate bonds, U.S. Treasury bonds, and assets backed securities. Over the last 10 years, this bond fund has a yield of 1.98% and a 30-day yield of 1.98%. This Fidelity bond fund as an expense ratio of 0.45%. There is no minimum investment requirement.
Taxable short-term bond funds: Vanguard Short-Term Investment Grade fund (VFSTX)
If you are not in a high tax bracket, then you should consider investing in a taxable short term bond fund. One of the best out there is the Vanguard Short-Term Investment Grade fund.
This bond fund provides investors exposure to high and medium quality investment grade bonds, such as corporate bonds and US government bonds. This fund has an expense ratio of 0.20% and an initial minimum investment of $3,000, making it one of the best short term bond funds out there.
T. Rowe Price Short-Term Bond Fund (PRWBX)
The T. Rowe Price Short-Term Bond Fund invests in diversified portfolio of short term investment-grade corporate, government, asset and mortgage-backed securities. This bond fund also invests in some bank mortgages and foreign securities. This fund produce a higher return than a money market fund, but less return than a long-term bond fund. The T. Rowe Price Short-Term Bond Fund has a minimum investment requirement of $2500, making it one the most favorite short term bond funds out there.
Vanguard Short-Term Bond Index Fund (VBIRX)
The Vanguard Short-Term bond is a good choice for the conservative investor. It offers a low cost, diversified exposure to U.S. investment-grade bonds. This has fund has a maturity date between 1 to 5 years. Moreover, the fund invests about 70% in US government bonds and 30% in corporate bonds. The bond fund as an expense ratio of 0.07% and a minimum investment requirement of $3,000.
How to Invest in Short-Term Bonds
If you’re considering in investing in these or any of Vanguard bond funds, you need to do your due diligence.
First, think about what you need the bond fund in the first place. Is it to diversify your investment portfolio?
Are you a conservative investor who need a minimize risk at all cost? Or, do you want to invest in a short term bond fund because you need the money to use in a few years for a vacation, buying a house, or planning for a wedding?
Once, you have come up with answers to this question, the next step is to do your research about the best bond fund available to you.
Use this list to start. If it’s not enough, do your own research.
Look into how much the initial minimum investment is to buy a bond fund. Most Vanguard short term bond funds require a $3,000 minimum deposit.
Some Fidelity bond funds, however, have a 0$ minimum deposit requirement.
Next compare expense rations, performance for different funds to see if they match your investment goals. But you have to remember that past performance is not an indication of future performance.
Your final step is to open an account to buy your bond funds. If you choose Vanguard, you can do so at their website.
How do you make money with short-term bonds?
You can make money with short-term bonds the same ways you make money with a mutual fund (i.e., dividends, capital gains, and appreciation). But most of your returns in a bond fund comes from dividends.
The bottom line
In brief, short-term bonds are great investment choices if you have short term saving goals. You may be interested in buying these bonds because you expect to tap into your investment within a few years or so. Or, you want a more conservative investment portfolio.
Short term bonds produce higher yields than money market funds.
The only problem is that the share prices can fluctuate. So, if you don’t mind market volatility, you may wish to consider short-term bonds.
Speak with the Right Financial Advisor
If you have questions beyond short-term bonds, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
The post 7 Best Short-Term Bonds Funds to Buy in 2020 appeared first on GrowthRapidly.
Although investing in the stock market can feel intimidating at first, it could be the key to achieving your financial goals. Short of hitting the lottery or building a thriving business that you can sell, buying securities that increase in value over time is usually the easiest path to wealth.
After all, the average savings account pays out a paltry 0.05% APY according to the Federal Reserve Bank of St. Louis, yet the average stock market return is around 10% per year before accounting for inflation.Â
Unless you want your money to languish in a savings account where itâs worth less with each passing year, learning to invest should be at the top of your to-do list.
6 Steps to Start Investing in the Stock Market
But, how do you start down a path that is notoriously complicated and has the potential to leave you withless money than you started? Here are a few top steps you should take to get started.
1. List Your Goals
Ask yourself what you hope to accomplish by investing in the stock market. A few examples of investment goals might include:
Making a quick profit by investing in the short-term, and reselling stocks at a higher price,
Creating a source of passive income you can use later on,
Growing investment earnings so it can cover your retirement, or
Saving money for a specific goal.
As you list out your goals, make sure you have the extra money to invest on a regular basis, while also having cash set aside for emergencies. If you have a lot of credit card debt or other high-interest debt, you might even consider paying it off before you begin investing. After all, the average credit card interest rate is currently over 16% â and you might not get an investment return anywhere close to that.
2. Start With Retirement Savings Accounts
There are advantages that come with investing in a retirement account. Accounts, like a workplace 401(k), a SEP IRA, or a Solo 401(k) are tax-advantaged, giving you the chance to reduce your taxable income (and thus, pay less in taxes) when you contribute.
With a 401(k) plan from your job, for example, you can contribute up to $19,500 in 2020 and again in 2021. If youâre age 50 or older, you can also contribute another $6,500 each year which is called, a âcatch-up contributionâ. The amount you contribute is taken off of your taxable income, so your tax liability is lower.
You might also qualify for an âemployer matchâ on contributions to your employer-sponsored retirement account. Check with your companyâs human resource department to learn if your employer offers this benefit.
Other retirement accounts to consider include a traditional or Roth IRA. You can deduct your full traditional IRA contribution from your taxable income, if you donât have a retirement plan at work. Another option is funding a Roth IRA which lets you contribute using after-tax dollars instead. This means you wonât get a tax deduction for contributing, but Roth IRA funds grow tax-free and you can take distributions at retirement age without paying any taxes.Â
In 2021, contribution limits for IRAs stay the same as 2020. You can contribute up to $6,000 to an IRA, or $7,000 if youâre age 50 and older.
3. Open a Brokerage Account
In addition to investing for retirement, you can also open a taxable brokerage account. You wonât get any upfront tax advantages for opening a brokerage account, but you get the chance to buy and sell stocks and other securities, or buy and hold them for the long-term.
There are excellent brokerage account options for beginners or experienced investors, many of which let you invest in some capacity without any fees. Some of the top firms to consider include:Â
Betterment: Best for Beginners
Robinhood: Best for No Minimum Balance Requirement
M1 Finance: Best for Free Trades
Learn More About Betterment
4. Compare Costs and Fees
You might not have a lot of options if youâre investing in your workplace retirement plan at first. If you have the option to select a brokerage firm, youâll need to compare the fees and costs involved in investing. Fees and costs to watch out for include:
Investment management fees. These fees can be nonexistent or as high as 1% of your account balance (or more).
Expense ratios. Specific funds, like index funds or mutual funds, might carry this fee.
Transaction fees. You might pay transaction fees when buying or selling a stock or another security.
Front-end loads. This fee can be charged on some investments upfront.
Annual account fees. A charge thatâs tacked on just for using your brokerage account.
These are just some of the main fees to watch out for, but there are plenty of others. If you want to figure out how much youâre paying in fees on your investment accounts, the free retirement fee analyzer tool from Personal Capital is a good place to start.
5. Start Off With Simple Investments
Youâve probably heard plenty about the âhot stocksâ of the last few years, and how investors who got in early have gotten rich by being in the right place, at the right time. Unfortunately, most âregularâ investors donât hear about hot stocks until itâs too late.
As a beginning investor, itâs usually best to keep your stock market strategy simple by investing in what you understand. Some beginning investments to consider include exchange-traded funds (ETFs), which are made up of various investments that track an index or focus on a specific industry sector. You could even stick to index funds, which are another type of investment that tracks an index and are mostly âhands-offâ for the investor.
Target-date funds are another type of simple investment to consider. These funds include a selection of stocks and bonds that adjust for less risk over time. If you purchase a target-date fund thatâs meant to last until 2050, for example, your risk would be high at first but slowly taper down as you approached 2050 or whatever âtarget dateâ you choose for retirement.
6. Research Before Jumping on Complex Strategies
If youâre curious about more complex investing options, youâll need to learn more about how and when to invest. Some resources to turn to include investing books, like:
The Little Book of Common Sense Investing by John C. Bogle
Investing All-In-One for Dummies by Eric Tyson
You could also check out top investing forums like Seeking Alpha or the Bogleheads forum, taking the time to read through questions and answers from investors at the top of their game.
Blog posts that can help you get started with some investing basics include:
How to Invest Essentials for Beginners & Intermediates
How the Stock Market Works
How to Buy Stock Online
The Bottom Line
Investing in the stock market can be nerve-racking, but starting with common-sense investments in place (e.g. employer-sponsored retirement account) and uncomplicated investments (like index funds), lets you ease into the process slowly.
Over time and with more experience, youâll have a better sense of when â and when not to â shy away from the risks of the stock market.
The post How to Start Investing in the Stock Market appeared first on Good Financial Cents®.
If you’re one of those investors with very little time to research and invest in individual stocks, it might be a good idea to look into investing in mutual funds.
Whether your goal is to save money for retirement, or for a down payment to buy a house, mutual funds are low-cost and effective way to invest your money.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
What is a mutual fund?
A mutual fund is an investment vehicle in which investors, like you ad me, pool their money together. They use the money to invest in securities such as stocks and bonds. A professional manages the funds.
In addition, mutual funds are cost efficient. They offer diversification to your portfolio. They have low minimum investment requirements.
These factors make mutual funds among the best investment vehicles to use. If you’re a beginner investor, you should consider investing in mutual funds or index funds.
Investing in the stock market in general, can be intimidating. If you are just starting out and don’t feel confident in your investing knowledge, you may value the advice of a financial advisor.
Types of mutual funds
There are different types of mutual funds. They are stock funds, bond funds, and money market funds.
Which funds you choose depends on your risk tolerance. While mutual funds in general are less risky than investing in individual stocks, some funds are riskier than others.
However, you can choose a combination of these three types of funds to diversify your portfolio.
Stock funds: a stock fund is a fund that invests heavily in stocks. However, that does not mean stock funds do not have other securities, i.e., bonds. It’s just that the majority of the money invested is in stocks.
Bond funds: if you don’t want your portfolio to fluctuate in value as stocks do, then you should consider bond funds.
Money market funds: money market funds are funds that you invest in if you tend to tap into your investment in the short term.
Sector funds. As the name suggests, sector funds are funds that invests in one particular sector or industry. For example, a fund that invests only in the health care industry is a sector fund. These mutual funds lack diversification. Therefore, you should avoid them or use them in conjunction to another mutual fund.
Additional funds
Index funds. Index funds seek to track the performance of a particular index, such as the Standard & Poorâs 500 index of 500 large U.S. company stocks or the CRSP US Small Cap Index. When you invest in the Vanguard S&P 500 Index fund, youâre essentially buying a piece of the 500 largest publicly traded US companies. Index funds donât jump around. They stay invested in the market.
Income funds: These funds focus invest primarily in corporate bonds. They also invest in some high-dividend stocks.
Balance funds: The portfolio of these funds have a mixed of stocks and bonds. Those funds enjoy capital growth and income dividend.
Related Article: 3 Ways to Protect Your Portfolio from the Volatile Stock Market
The advantages of mutual funds
Diversification. You’ve probably heard the popular saying “don’t put all of your eggs in one basket.” Well, it applies to mutual funds. Mutual funds invest in stocks or bonds from dozens of companies in several industries.
Thus, your risk is spread. If a stock of a company is not doing well, a stock from another company can balance it out. While most funds are diversified, some are not.
For example, sector funds which invest in a specific industry such as real estate can be risky if that industry is not doing well.
Get Matched With 3 Fiduciary Financial Advisors
Investing in the stock market can be intimidating and overwhelming. We recommend speaking with a financial advisor. The SmartAssetâs free matching tool will pair you with up to 3 financial advisors in your area.
Hereâs how it works:
1. Answer these few easy questions about your current financial situation
2. In just under one minute, the tool will match you with up to three financial advisors based on your need.
3. Review the financial advisors profiles, interview them either by phone or in person, and choose the one that suits yourâ needs.
Get Started Now>>>
Professional Management.
Mutual funds are professionally managed. These fund managers are well educated and experienced. Their job is to analyze data, research companies and find the best investments for the fund.
Thus, investing in mutual funds can be a huge time saver for those who have very little time and those who lack expertise in the matter.
Cost Efficiency. The operating expenses and the cost that you pay to sell or buy a fund are cheaper than trading in individual securities on your own. For example, the best Vanguard mutual funds have operating expenses as low as 0.04%. So by keeping expenses low, these funds can help boost your returns.
Low or Reasonable Minimum Investment. The majority of mutual funds, Vanguard mutual funds, for example, have a reasonable minimum requirement. Some funds even have a minimum of $1,000 and provide a monthly investment plan where you can start with as little as $50 a month.
Related Article: 7 Secrets Smart Professionals Use to Choose Financial Advisors
The disadvantage of mutual funds.
While there are several benefits to investing in mutual funds, there are some disadvantages as well.
Active Fund Management. Mutual funds are actively managed. That means fund mangers are always on the look out for the best securities to purchase. That also means they can easily make mistakes.
Cost/expenses. While cost and expenses of investing in individual stocks are significantly higher than mutual funds, cost of a mutual fund can nonetheless be significant.
High cost can have a negative effect on your investment return. These fees are deducted from your mutual fundâs balance every year. Other fees can apply as well. So always find a company with a low cost.
How you make money with mutual funds.
You make money with mutual funds the same way you would with individual stocks: dividend, capital gain and appreciation.
Dividend: Dividends are cash distributions from a company to its shareholders. Some companies offer dividends; others do not. And those who do pay out dividends are not obligated to do so. And the amount of dividends can vary from year to year.
As a mutual fund investor, you may receive dividend income on a regular basis.
Mutual funds offer dividend reinvestment plans. This means that instead of receiving a cash payment, you can reinvest your dividend income into buying more shares in the fund.
Capital gain distribution: in addition to receiving dividend income from the fund, you make money with mutual funds when you make a profit by selling a stock. This is called “capital gain.”
Capital gain occurs when the fund manager sells stocks for more he bought them for. The resulting profits can be paid out to the fund’s shareholders. Just as dividend income, you have the choice to reinvest your gains in the fund.
Appreciation: If stocks in your fund have appreciated in value, the price per share of the fund will increase as well. So whether you hold your shares for a short term or long term, you stand to make a profit when the shares rise.
Best mutual funds.
Now that you know mutual funds make excellent investments, finding the best mutual funds can be overwhelming.
Vanguard mutual funds.
Vanguard mutual funds are the best out there, because they are relatively cheaper; they are of high quality; a professional manage them; and their operating expenses are relative low.
Here is a list of the best Vanguard mutual funds that you should invest in:
Vanguard Total Stock Market Index Funds
Vanguard 500 Index (VFIAX)
Total International Stock index Fund
Vanguard Health Care Investor
Vanguard Total Stock Market Fund
If you’re looking for a diversified mutual fund, this Vanguard mutual fund is for you. The Vanguard’s VTSAX provides exposure to the entire U.S. stock market which includes stocks from large, medium and small U.S companies.
The top companies include Microsoft, Apple, Amazon. In addition, the expenses are relatively (0.04%). It has a minimum initial investment of $3,000, making it one of the best vanguard stock funds out there.
Vanguard S&P 500 (VFIAX)
The Vanguard 500 Index fund may be appropriate for you if you prefer a mutual fund that focuses on U.S. equities. This fund tracks the performance of the S&P 500, which means it holds about 500 of the largest U.S. stocks.
The largest U.S. companies included in this fund are Facebook, Alphabet/Google, Apple, and Amazon. This index fund has an expense ration of 0.04% and a reasonable minimum initial investment of $3,000.
Vanguard Total International Stock Market
You should consider the Vanguard International Stock Market fund of you prefer a mutual fund that invests in foreign stocks.
This international stock fund exposes its shareholders to over 6,000 non-U.S. stocks from several countries in both developed markets and emerging markets. The minimum investment is also $3,000 with an expense ratio of 0.11%.
Vanguard Health Care Investor
Sector funds are not usually a good idea, because the lack diversification. Sector funds are funds that invest in a specific industry like real estate or health care. However, if you want afund to complement your portfolio, the Vanguard Health Care Investor is a good choice.
This Vanguard mutual fund offers investors exposure to U.S. and foreign equities focusing in the health care industry. The expense ration is a little bit higher, 0.34%. However, the minimum initial investment is $3,000, making it one of the cheapest Vanguard mutual funds.
Bottom Line
Mutual funds are great options for beginner investors or investors who have little time to research and invest in individual stocks. When you buy into these low cost investments, you’re essentially buying shares from companies.
Your money are pooled together with those of other investors. If you intend to invest in low cost investment funds, you must know which ones are the best. When it comes to saving money on fees and getting a good return on your investment, Vanguard mutual funds are among the best funds out there.
They provide professional management, diversity, low cost, income and price appreciation.
What’s Next: 5 Mistakes People Make When Hiring A Financial Advisor
Speak with the Right Financial Advisor
If you have questions beyond knowing which of the best Vanguard mutual funds to invest, you can talk to a financial advisor who can review your finances and help you reach your goals (whether it is making more money, paying off debt, investing, buying a house, planning for retirement, saving, etc).
Find one who meets your needs with SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.
*TOP CIT BANK PROMOTIONS*
PROMOTIONAL LINK
OFFER
REVIEW
CIT Bank Money Market
1.00% APY
Review
CIT Bank Savings Builder
0.95% APY
Review
CIT Bank CDs
0.75% APY 1 Year CD Term
Review
CIT Bank No Penalty CD
0.75% APY
Review
The post What Are Mutual Funds? Understanding The Basics appeared first on GrowthRapidly.
