In the personal finance realm, there are all kinds of tools in which you can invest. You can get some of them through your work, and you can purchase others on your own. They can pay significant dividends, particularly if you diversify your portfolio and make your money work for you.
We’ll go over some different financial tools in this article. We’ll discuss why you may want to invest in each of them, and we’ll talk about any potential drawbacks that each one might present.
Why Invest in Various Finance Tools?
Before we get into the different tools that are out there, we should explain why they’re going to interest you. Your short and long-term financial health is the main reason why you should look into investment tools and strategies.
Some people don’t plan for their financial futures. Instead, they spend their money recklessly and hope they’ll see an unexpected windfall.
The Federal Motor Carrier Safety Administration says that Texas and nine other states represent 51% of truck or bus fatal crashes. A resident of these states might try to pursue a wrongful death lawsuit if a commercial vehicle kills a family member.
However, you can’t count on lawsuits for your financial future any more than you can rely on a rich relative leaving you money or winning a Powerball jackpot. These things happen occasionally, but you’re better off pursuing reality-grounded investment strategies. Now, let’s go over some of the tools at your disposal.
A 401K program is something that your work might offer to its employees. Workers get a chance to save for their futures this way.
A 401K is a retirement account. You put funds into it from your paycheck each week, or possibly every month if you’re on that pay schedule. Some employers will also match your contributions up to a particular percentage, such as 2, 3, or 5%.
401K programs are great because when you put money into them each pay period, you’re saving for your future and your family’s future. You can also get what amounts to free money if your employer generously matches part of your contribution.
You can cash in your 401K once you get to retirement age. You can use that money in retirement, along with your Social Security payouts.
The one drawback is that if you have very little money in the present, you probably need every penny you can get. When you put money in your 401K every pay period, that’s less money you have to spend on rent, food, utilities, and so forth right now.
Maybe you’re self-employed, or you have a job that does not offer a 401K program. Some of them don’t, particularly if the job is what some people call “unskilled” labor. Food service industry jobs, for instance, don’t often provide 401K programs.
An IRA is a retirement account you open yourself with a bank. You put money in it when you can afford to do so, and it generates interest. Like a 401K program, you wait until retirement age, and then you collect that money.
The drawback is the same as with a 401K program. You can’t spend in the present what money you’re saving for the future.
Also, if you need that IRA money desperately, and you decide to cash out early, you’ll usually have to pay a penalty on that. If you don’t want to pay that penalty, you’ll have little choice but to wait until you get to retirement age to claim that cash.
A Mutual Fund
Maybe you want to get into investing, but you feel like purchasing individual stocks is too risky. That makes sense since buying individual stocks is a significant gamble due to how much they can fluctuate.
Buying into a mutual fund essentially means that you’re buying up many stocks and other commodities at once. A financial expert controls what commodities make up the mutual fund. The idea is that your investment will grow over time, and you’ll get more money out of it depending on how many shares of the fund you bought.
You can cash out your mutual fund shares at any time without suffering a financial penalty. The only potential drawback is that even though mutual funds are safer than single stocks because they’re more diversified, even a mutual fund can go up and down depending on what the market’s doing.
If you can leave your money in a mutual fund for five or ten years, you’ll probably make money off it since history shows that mutual funds usually go up over longer periods. However, if you buy into a mutual fund and then decide you need that money again just a couple of months later, you might lose money that way if the market’s not doing so well at that time.
A CD is another financial tool you can consider. You can buy a certificate of deposit for a set amount, usually from a bank, and it will often bring back a higher interest rate than something like a savings account would. You might get a 6-month CD or one that matures in a year, two years, or even five or ten years.
CDs are safe since market volatility cannot touch them. Like IRAs and 401Ks, though, you can’t collect that money until the maturation date. With most CDs, you incur a penalty if you need to withdraw the money early.
Because of this, you need to be as sure as possible that you won’t need that money before the maturation date, or it kind of defeats the purpose of buying one. Also, if the economy isn’t doing so well when you’re CD shopping, the interest rates you can get for them aren’t going to be all that high.
You might decide to purchase several of these tools if you can afford them. Diversifying your financial portfolio is one of the fundamental strategies in which any individual can engage.