People know that it is important to save money. However, there is a difference between saving and investing. When you invest, not only are you setting aside your money to be spent at a later date, but you are also making the money grow for you in the mean time. Smart investing can improve your financial security. Here are some tips on the best approach to investment planning.
First, you should be clear on what your investment goals are. Perhaps you are saving for a house, a car, your children’s college fund, your retirement, and so forth. If you are married, discuss this with your spouse so that both of you will agree on the same investment goals.
Once you have your goals, think about what your timeline is. When do you need the money? Some goals are short, like if you are saving for a car or for a vacation. Short-term goals are usually no more than a couple of years long. These will require short-term investments, like short-term CDs and money market funds. They pay slightly higher interest than a regular savings account and are more liquid than other types of investments.
You have more investment options for your long-term goals, like for your retirement. The type of investments that you want to make will depend on your age and when you want to retire. The longer your investment horizon is, the more options you have. If you have at least 20 years until you retire, you should put more into the equity market because historically, returns from stocks are higher than returns from most other types of investments. The stock market has more risks, but the longer investment horizon helps even out the risk a little more.
People who are closer to retirement should invest more conservatively. It may be tempting to invest in a risky emerging market for greater return potential, but because their investment horizon is shorter, it will not allow them to recover from any potential losses. Investing conservatively may not bring stellar returns quickly, but it will preserve the value of the portfolio.
If your company has a retirement program, you should take full advantage of it. You can usually elect to invest a percentage of your pre-tax income into your company-sponsored retirement account. Some employers will even match that contribution. Even if you do not get a company match, your participation will be make it very easy for you to save for retirement.
The type of investment you make should also match your aversion to risk. If you are relatively young, but are easily influenced by market fluctuations, you should invest more conservatively just so you can sleep better at night.
It is a good idea to consult with a professional investment planner so that you can get expert advice on investment planning. He can help you put together your portfolio based on your needs and your timeline. Every year, you should look at your investment mix to see if you need to reallocate your funds based on any changes in your life’s events. When you plan well, you will have better peace of mind about your financial security.