Investing in your future needs to start long before you approach the age to retire. In fact, you should start saving as soon as your student loans and other similar obligations are paid off.
You may even want to set aside a little while you are paying off other debts, if at all possible. When you officially decide to start investing in your future, you have several options to choose from.
Which one you decide on solely is dependent upon your needs and financial situation. You might want to consider investing in a few options to be on the safe side.
A 401K is an investment option to save for your retirement that receives its name from the Internal Revenue Service law. Generally, this form of savings plan is only available through an employer. Your place of employment will invest your money into the money market and stock funds, which will help to increase your earnings.
The benefits of a 401K include:
- Easy to begin investing in
- Usually, money is directly taken from your paycheck
- Are typically a safe investment
- Can alter investment options, such as how risky your investments are and how much you want deducted from your pay
- May borrow against your 401K without it showing up on your credit report
- May borrow against it for any purpose
The downside of a 401K is that the risky investments may not grow rapidly. You will also not receive any kind backing from the Pension Benefit Guaranty Corporation, unlike many other types of investments that are safeguarded by this establishment. Additionally, if you borrow against it, fees are oftentimes tacked onto the loan repayment amount.
UK Pension Plan
In the UK, there is not a true 401k, since you cannot pay through your place of employment. However, the closest English equivalent is a pension plan through a private pension company. In some instances, you may need to convert your pension into a US 401K, if you move or work for company stationed in the US.
Benefits of a pension plan include:
- Being free of capital gains tax
- Easy to manage
- You receive compound interest
The down side to a pension plan is that you have no access to your money, which in some cases might be a positive so you cannot use it longer before retirement. In addition, when you stop your payments on the pension plan, you may lose a larger per cent; however, a larger number of UK pension providers ended this practice.
Stocks are a form of investment for your future that allows you to invest money and become a shareholder in the company. You will be able to invest in either a common stock or a preferred stock.
Common stocks give you the right to vote on certain aspects that affect the company, such as who is placed on the board of directors. With a common stock, you are not granted the right to vote; however, you still receive regular dividends, but these amounts tend to be greater than those of a common stock.
The benefits of stocks include:
- Easy liquidity, meaning you can easily convert your stocks into cash
- Easy for anyone to invest, as long as the person has an adequate amount
- The right investment has the ability to yield high returns
The downside of stocks are that they are quite a risky investment. Well, at least some stocks are extremely risky. A company with a proven track record of success on the stock market may take a downward spiral at any time. In addition, the economy and events that occur within the company have a strong impact on your stocks.
A money market account is an investment option that pays you interest on your money. The amount of interest depends upon the bank or credit union you invest your money through.
The benefits of a money market account include:
- Very safe form of an investment
- Are backed by the Federal Insurance Deposit Corporation (FDIC)
- Higher interest rates than traditional savings plans
- You receive interest on your interest
There are a few negatives of opening a money market account. For instance, you have to have a high initial investment to earn the most amount of interest. In fact, some financial institutions start offering the option when you have $10,000 to open one with.
Also, your rate for the first year will be tremendously higher than what your permanent rate will be. Fees and penalties may occur for various reasons including too many withdrawals and exceeding the minimum amount limitations.
Isaac writes about business subjects such as total reward and employee benefits, in his spare time Isaac is a wannabe’ chef and like to cycle competitively.