As we continue to have conversations about elements of a legacy building budget, the overall goal is to transition past living paycheck to paycheck and paying bills to having a strategic plan that enables your money to work for you and satisfy your long-term goals. What you do with your money today will have exponential impact over time due to the magical effect of compound interest! The same way that banks and financial companies make lots of money off of you over time by extending credit to you at high interest rates, you can make your money grow for yourself if you invest in instruments that have a high rate of return. Placing your money in a savings account or a CD (Certificate of Deposit) will typically allow your money to grow at a rate of about 1-2%. These are great options to consider for your emergency funds which is essential to have PRIOR to investing. However, the key to investing is to place your money in instruments that have high rates of return.
To illustrate, I will use my personal experience as an example. I have been an officer in the United States Navy for 24 years. I recognized shortly after I joined that one day, I will have to separate or retire from the Navy and that I need to start preparing today for that eventuality. I got life insurance in place, built up an emergency savings, paid off my debt, and started investing. I started by investing in a Roth IRA, then TSP (analogous to a 401k), and then started investing in mutual funds and index funds. I had a mutual fund account to save for my daughter’s college tuition and then started investing in index funds to fund my business start up account. Over the course of about 10 years, my daughter went to college and I paid for two years of her college tuition with the other two years funded by my GI Bill that I was able to transition to her. Because I was able to transition my GI Bill, that enabled me to pay for her books and other college expenses as well as buy her a car. About 4 years ago, my husband and I started a commercial real estate investment company. To get the company started we paid close to $1M dollars for our first commercial property in cash. Almost half of which came from the business startup fund that grew tremendously over time by investing in mutual and index funds. I have now transitioned to investing largely in real estate through my commercial real estate company as well as individually by acquiring vacation rentals. I still invest in the market to enable me to assist with my grandson’s college tuition and to one day pay off all my real estate investments or be postured to fund a future business opportunity if one that truly resonates with me presents itself. These actions were enabled by having a legacy wealth building budget and having the disciple to stick to it and review and adjust it as life situations dictated. Everyone’s goals and life priorities are different, but the main point is to start investing your money today to make your money work for you in the future!
Here are six great investment vehicles to consider:
- Individual stocks. Investing in individual stocks can be fun, but also risky if you don’t have the skill and expertise to properly evaluate stocks and choose wisely. Before you invest in individual stocks, do your homework and understand your risk tolerance. I invest in individual stocks more as a teaching moment for my grandson. This past Christmas, I bought him a Nintendo Switch, but I also purchased for him stock in Nintendo and sat down with him and talked about the company and its products. The Nintendo stock is a part of his college fund, but the fund is largely comprised of mutual funds. The point is, if there is a company that resonates with you and you are a big advocate for/loved to use their product, consider purchasing the individual stock and let that company work for you.
- Mutual Funds. Mutual funds are an easy way to invest for those who want to have their money managed by a fund manager. Because mutual funds are professionally managed, they often contain fees and commissions that will impact your bottomline. It is important to understand that many fund managers do not perform better than the market, especially after considering the fees and commissions, but it is a great way to get started.
- Index Funds. Index funds are a great way to invest in the market. Instead of paying fees ad commission to a fund manager, you are buying a fund that has already been indexed. Because there is no manager, the fees are far less and the results track with the market. It is a great was to set it and forget about it investment strategy to build long term wealth.
- Exchange Traded Funds (EFTs). Exchange traded funds are basically index funds that you can buy and sell like a stock.
- Bonds. A bond is a loan made to a company. The bond issuer will the pay you back with interest. Bonds are typically a safer investment than stocks and typically provide a lower rate of return.
- Real Estate. As a commercial real estate investor, this is my personal favorite investment. There are many real estate investment strategies all with their own levels of risk and return. Real estate is a great way to build wealth. It can also provide passive income to aid you on your legacy wealth journey. However, it does take more work than buying stocks or bonds.
- Retirement Accounts
- Traditional IRA. A traditional IRA currently allows you to contribute up to $6000 pretax dollars per year. Taxes are paid upon distribution of the funds during retirement at a lower tax rate (if you did not pull it out early because of a financial emergency and pay a high tax penalty)
- Roth IRA. A Roth IRA allows you the same options as a traditional IRA, but the contributions are made after tax. However, all the contributions and growth can be withdrawn tax few at the age of 59 ½. Roth IRA offers more flexibility to take withdrawals of contributions without paying taxes which is a huge benefit. However, there are income limits to being able to contribute to a Roth IRA.
- Commodities. Commodities are typically natural resources that are traded in bulk. Resources such as agricultural products, precious metals, lumber, foreign currency, and fossil fuels are all considered commodities. Commodities are usually traded at futures rates. Individual investors typically purchase commodities pools, which are similar to mutual funds or EFTs.
- Cryptocurrencies. Cryptocurrency is a digital currency that is backed by cryptography (i.e. Bitcoin) Cryptocurrency can be used to buy goods and services, but is most often used for trading and investing. You buy tokens using cash with the hope that it increases in value as cryptocurrency become more popular due to its security.
There are many investment vehicles. They key is to have an understanding of and feel comfortable with the one that you choose as a means to help you meet your financial goals. When you invest, you are making your money work for you, your children, and your children’s children!
This article is a part of a series:
If you need help with creating a legacy wealth budget for your household, please do not hesitate to contact me for help.
Charleese Hasan, The Budget Dr. OH Charlie LLC firstname.lastname@example.org