Wealth management starts with taking charge of your personal finance. It has its own challenges and most of the time it’s catching up or busy paying off debt. We all work hard for the money, but we certainly want to make sure the money works at least twice as hard as we do. There is so much information that supports the fact of early investing, saving and preparing financial goals, but in all honesty, it is overwhelming to decipher all the different forms of investment securities. Below is a list of various methods of investing and the vehicles used to invest, though it’s not exhaustive hopefully it provides some helpful information. Please, with any financial information do your research and consult a financial advisor.
Simply, options are buying and selling of contract securities with an aim to make a profit. An option is a contract that gives the buyer the right to buy or sell a security, such as stock or exchange-traded fund (EFT) within a specific period of time. The price of an option is called a premium, options are commonly used in the stock market, futures, forex, and other markets. Most investors use contract options to hedge positions for both buying and selling the stock.
Call Option – is the buyer who has the right to buy the stock at a certain price
Put Option – buyer has the right to sell the stock at a specific price before it the options expire.
Strike Price – this is when buyers can exercise their right to buy or sell at the strike price
This type of investment is between you and the insurance company, where the company makes periodic contributions to you sometime in the future. You can purchase the annuity in a single transaction or make a series of payments known as premiums. There are varying forms of annuities which include fixed, variable and indexed.
You have a guaranteed rate of return, and the payout of your payout rate is based on your age, life expectancy, and prevailing interest rate. Even though the annuity states fixed, the annuity can change over time, it is best to understand your contract. The payout can be for an entire lifetime or you can choose another time period. Something important to note is your taxes, assets in a deferred fixed annuity, your investment grows tax-deferred.
This form of investment allows you to select from various investment choices, such as mutual funds. The variable annuity rate of return changes with the stock, bond and money market funds, in addition, the variable funds are also compared to mutual funds because of the similar investment features. The structure of a variable annuity offers three basic features, which include:
- a death benefit
- annuity payout payout
- tax-deferred treatment of earnings
Variable annuities do not provide any guarantee that you will earn a return on your investment.
The best approach is to fully understand all the terms, fees, expenses and additionally the prospectus.
This type of investment includes both fixed and variable annuities. They offer a minimum guaranteed interest rate, additionally, this type of investment is more complex in regards to the other two. They are also known as “equity-indexed annuities” or “fixed indexed annuities” mainly because they have characteristics of variable and fixed annuities. Index annuities are not simple to understand and one of the complexities is that there are several methods to calculate gains, this may be difficult for investors to compare one indexed annuity to another.
Best approach before purchasing an index, it is best to fully understand each feature and how it works, as this may have a greater impact on our retains.
A bond is simply a loan that an investor makes to the corporation, government or any other organization and in exchange, they get paid an interest rate over the specified amount of time.
The structure of a bond is similar to a lender and a borrower. There are many different types of bonds and the quality of “borrowers” varies as well, such as corporate bonds, municipal bonds, treasury bonds or agency bonds. Bonds also carry various risk factors some of them include interest rate risk, call risk, default and credit risk. All these risk factors are associated with the possibility of you losing your money.
Just a simple rule of thumb, when interest rates fall, bond prices rise, and when interest rates rise, bond prices fall. Make sure you evaluate the quality of your bond, as all bonds are not valued the same, therefore different credit ratings.
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This type of investing offers diversification to an investment portfolio and offer various advantages instead of purchasing individual stocks or bonds. A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities.
The money is used to purchase various securities instruments such as stocks, bonds or short-long term investments. You can find more details of a mutual in a document called a prospectus which includes investment strategies, risk profile, management or fees. Here is how mutual funds works, any profits achieved are shared after expenses, and the payments to its shareholders are known as income distributions.
Capital gains are achieved after selling an investment in its portfolio at a profit and are passed to shareholders (you) as capital gains (after expenses are deducted) You would have to pay taxes on the fund’s income distributions, unless if you have a tax-deferred or tax-free account. Best to communicate with your tax advisor of what is the best option for you to take.
Exchange-Traded Funds (ETF)
Exchange-traded Funds (ETF) are a combination of mutual funds and conventional stocks. This may be a bit confusing since the investment vehicles are similar. Below are the distinguishing factors of ETF’s being pooled investments, they offer the investor an interest in a professionally managed and diversified portfolio investments. ETF’s shares can be bought throughout a trading day at varying prices.
There are many different types of ETFs and they are not created the same.
Most ETFs are registered with the SEC as investment companies, but keep in mind that ETF’s that invest in commodities, currencies (and other investments) are not registered investment companies. The management style can either be active or passively tracked. Passively managed ETF’s aim to achieve the same return as the index that they are tracking.
This is the most known form of investment when you buy into a company, that is buying stocks or shares of that company. There different types of stocks but the main ones are preferred stock and common stock. Preferred stock is when you get dividends and the common stock does not issue dividends.
When you evaluate the stock, the EPS (earnings per share) is one indicator of the company’s current strength. To either buy or sell the stock one would need a brokerage account and the stockbroker at the firm will have to execute the trade for you.
There are many types of investment account and a Roth IRA offers multiple benefits and has set rules one should follow. Contributions in a Roth IRA and investment earnings grow tax-free, meaning there’s no tax on your Roth IRA withdrawals in retirement. Unlike in a Traditional IRA, withdrawals in retirement are taxed as income. Roth IRA can be opened at a brokerage or bank and you can make a selection of what type of investments to make, such as mutual funds, stock, bonds etc.
Benefits of a Roth IRA
- You can withdraw the money you contributed without tax or penalty at any time, with no restrictions, because you’ve already paid taxes on that money. (be mindful of this rule because you can be penalized if you withdraw earnings on your investments, but not contributions)
- There is no age limit to opening a Roth IRA, but there is a limitation in what you can contribute each year
- This is one of the most advantageous reasons for opening a Roth IRA, your money grows tax-free and the withdrawals are tax-free as well.
401(k) is an employee-sponsored retirement option. Usually, an employer matches your contribution up to a certain amount, for instance, every dollar you put into your 401(k) an employer can match every dollar up to a certain amount.
401(k) Facts below
- You have less control of investment strategies and or options
- Just like Roth IRA, there are yearly imposed contribution limitations.
- Distributions in retirements are taxed as ordinary income unlike Roth IRA
- It has a high annual contribution limit (there is a maximum contribution limit the government sets each year)
Most financial advice supports the fact that when it comes to 401(k) do not leave free money on the table, contribute up the amount your employer is matching and the rest fund your Roth IRA as your money will grow tax-free
Top Wealth Building Questions
What Should I Invest in to Build Wealth?
The best investment that create wealth includes investment have that a high rate of return and low risk. The more traditional retirement investments such as 401(k) or IRA, they normally take a what feels like lifetime to accumulate and grow.
The best approach is to determine which investments work with your time frame and which ones can be more aggressive in growth.
Below are some aggressive investment
- Starting a business
- Real Estate
- Index Funds
Can Investments Make You Rich?
Yes. Comparing to the standard interest rate you get from a savings account, you can easily earn more money with a diversified investment portfolio. Just like with any investment, it is advisable to research the type of investment that will yield the highest rate of return as well as the risk associated.
Another factor to consider is how aggressive you want your investment portfolio to be structured. Usually, the more aggressive, the higher the returns and the higher the risk.
KEY NOTE = Index Funds are considered to be on the conservative side but they tend to outperform 401(k)
What does it mean to Build Wealth?
Wealth building is the process of creating multiple investment strategies that in turn consistently generate multiple long term income. Financial planning is the first step to creating a plan that can actually yield results. It takes into consideration your target date and determines how much periodically invest in order to meet your target.
How Can I Build Wealth Fast?
In order to build wealth fast it requires a solid financial foundation to start with. The best approach is to implement the basic financial fundamentals such as budgeting, paying off debt and setting financial goals. Once you have set your financial goals, actionable tasks would be a priority such as aggressively increasing your income. The more disposable income you have, the more you can allocate to multiple investment streams
How do the Wealthy Stay Wealth?
There are various financial strategies that the wealthy implement to make, grow and safeguard their assets. The below list only highlights the few strategies.
INCOME – The wealthy generally have multiple ways to generate income and not only that, they implement strategies that compound their earnings.
- FOR INSTANCE: Your 401(k) earns about 4% per year while SPY earns about 10%. The above example shows why the wealthy can easily compound their income mainly due to strategies that accelerate their growth
TAXES – Many wealthy people they create financial instruments that legally allows them to pay lower taxes. Such as different company entities LLC / S Corp / Trust etc. This is one of the greatest tool they have as their tax bill is lowered that means they have more disposal income.
ASSET PROTECTION – There are many ways to set up a business. The correct formation of your business can also protect your investments. For instance, if you have a business and it gets sued, as a sole proprietor you can be personally sued as well unlike an Limited Liability Company (LLC), only your business sued and not your personal asset.
INHERITANCE – This is one of the most debated topics regarding generational wealth, on how to pass your wealth to the next generation with limited tax exposure. Through financial planning, they are able to different types of company structure that allow them the easily transfer wealth.
What Should I Invest In to Build Wealth?
Wealth building is all depended on your goal and time frame of what suits your needs. Usually the more time you have towards your target date, the more aggressive the investment strategies are applied. For instance, if you are closer to your target date then the investment strategies selected are more conservative instead of being aggressive.
The best approach to verify in which type of investment create wealth, first identify which investments are available to you (as some require accredited investors), thereafter, verify how much money is needed to start as well as educating yourself.
How do You Build Wealth from Nothing?
The first step to building your wealth is to first take note of your current financial status and then decide what your financial goals are. For instance, this may be paying off debt, creating passive income and retirement. All these are financial goals.
The second step would be to know your exact debt and paying it off, while simultaneously creating passive income that increase your disposable income.
The third step would be to investigate which investment strategies fit your model. The power of compound interest is one of the most desired tool to gain wealth.
The fourth step would be to constantly monitor by adding or removing investment strategies that are not yielding your desired performance.
What is the Key Ingredients in Building Wealth?
The main ingredients of building wealth includes: Discipline. Knowledge and Disposal Income.
Discipline: this is an essential tool when it comes to building and maintaining wealth. Tools like budgeting and financial planning are advantageous to this section
Knowledge: before starting to invest in any strategies, it is best to fully understand the risks and rate of return. The idea is your money to generate more money and not burn it. PLEASE DO A THROUGH RESEARCH BEFORE INVESTING
Disposal Income: as your income increases or investments yield dividends it advisable to reinvest it instead of funding new lifestyle demands.
What is the Best Way to Accumulate Wealth?
The best way to accumulate wealth is to first access your financial status and then determine your financial goals. Debt is the most aggressive form of wealth depletion, therefore, it is better to pay it off as soon as possible.
The best investments that creates wealth are investments that bring a high rate of return and have the ability to hedge and manage risks effectively.
There are different types of investment but they mainly fall under two categories, ones that generate income passively and ones that you actively manage.
Regardless of the option you choose, there are 4 main principles of becoming wealthy. Make. Save. Invest. Debt Free
Where Should a Beginner Invest?
The best approach is to start with investments that are generate income passively and don’t require massive capital. After paying your debt or at least having a strategy to paying off, it best to start by educating your self in the different types of investments and associated risks. Below is not an exhaustive list but can be a starting point:
- Retirement accounts
- Index Funds
- Mutual Funds
How do You Build with Little Money?
The best way to build wealth with little money is to look for investments that do not require massive capital to start with and getting a decent rate of return.
Some investment to consider include
- index Funds
- High Yield Savings Account
- Stock Trading
- Side Hustle
There are many types and ways to invest your money in, the most imperative aspect is to research, determine your level of risk tolerance and start investing. The best approach is to understand the rules, especially, contribution limits, withdrawals and or penalties.
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