Strategies For Your Investments
Making sensible investments starts with understanding certain aspects of the investment world. Ongoing research and planning goes a long way when attempting to protect your money and save for the future. Finding the best type of investment for your individual needs can be overwhelming, especially if you are just starting out. Since investing money is such a broad area, it is essential to have a plan, or investment strategy.
Strategy #1 – Savings Bonds Investments
Considered one of the safest types of investments, savings bonds are debt securities that are issued by the United States Department of Treasury. There are two types of bonds. EE bonds are paper-type bonds that most people are familiar with, and I bonds. I bonds are somewhat different than the EE bonds. Saving bonds are a long-term investment that accrue fixed or market value interest every six months. Starting out at $25, these investments are affordable and safe. They are completely secure and will be replaced if they are lost or stolen.
Strategy #2 – 401K / RRSP Investments
A 401k plan (called an RRSP or Registered Retirement Savings Plan in Canada) is an investment in which companies allow their employees to make contributions of a specified maximum amount each year. The employers usually also make contributions by matching a certain percentage with the employee. These plans were taken on by employers as an alternative retirement plan. The employee chooses where their savings will be invested, which usually consists of a combination of stocks, bonds and money market investments. One advantage to 401k plans / RRSPs is that they are tax-deferred investments, however, they are greatly penalized if taken out prematurely.
Strategy #3 – Invest In a Tax-Free Savings Account (TFSA)
A Tax-Free Savings Account (TFSA) is available in Canada only, and allows the investor to save up to $5000 each year in a bank account, without any tax consequences on capital gains earned. Any unused portion can be carried forward in future years. A typical strategy with Tax-Free Savings Accounts involves spouses with different incomes: A higher earning spouse puts money into the Tax-Free Savings Account of a lower earning spouse, effectively doubling his or her limit. The difference between an RRSP and a Tax-Free Savings Account is summed up by the Canada Revenue Agency as so:
“An RRSP is intended for retirement. A Tax-Free Savings Account is like an RRSP for everything else in your life.”
Strategy #4 – Investing for Capital Gains
Capital Gain is a profit that an investor realizes when an asset is sold at a higher rate than the original purchase price. Capital Gain Taxes are the taxes in which those profits incur. The investor does not incur those taxes until the asset is sold. Some investment assets are exempt from these taxes such as a person’s private residence or a transfer of assets from spouses.
Strategy #5 – After Hours Trading
At one time in our history, investors could only buy and sell stocks during business hours in U.S. Trade Markets such as the New York Stock Exchange and the NASDAQ Stock Market. Since the 1990’s investors have the ability to make investments after hours with the invention of Electronic Communications Network or ECNs. One difference between trading during traditional hours and after hours is that the after hours market does not compare on multiple markets. While after hours marketing allows investors to keep up with current investment news, it is much riskier than the conventional method.
Strategy #6 – Use Internal Rate of Return to Track Your Investments
The Internal Rate of Return or IRR in investments is simply the rate of growth a project is expected to yield. It is basically a prediction used to measure how profitable an investment is going to be. More specifically, the IRR is the interest rate at which negative cash flows is equal to the positive cash flows which equal zero. When planning to make an investment, this is a great tool to use to see projected profits.
Strategy #7 – Annuities As Investments
Annuities are fixed payments investments that are paid over a period of time. The investor makes periodic payments to a financial institution or an insurance company. The amount the investor receives depend on how much is paid each period and for how long. This investment is generally low risk. Fixed annuities have a fixed payment and are similar to government bonds and corporate bonds. They are not regulated by the Securities and Exchange Commission. Variable Annuities are regulated by SEC and allow investments in money marketing.
Strategy #8 – Review Tax Laws
Being aware of tax laws concerning your investments is essential. Estate Tax or the “death tax” is a tax that gives people the right to transfer property in the event of their death before the property is distributed to the heirs. This tax does not apply to assets or property transferred to the surviving spouse. Other heirs, however, may owe estate tax if the assets exceeds the inclusion limits as set forth by the government. Due to estate taxes being high, careful planning should be implemented to ensure safety of the investments.
Gift Tax differs from Estate Tax in that it is a federal tax that is applied when one person gives something to another while they are still living. The giver of the gift is usually responsible for paying the tax but the receiver can also pay it, although rare. Exemptions from the gift tax include a gift between spouses, gifts to political organizations, gifts that are valued at less than the annual tax exemption and donating money for educational purposes or hospitals. This a good thing to familiarize with to protect investments from high taxes.
Strategy #9 – Consider Setting Up A Uniform Gift To Minors Account (UGMA)
Uniform Gift to Minors Account or UGMA is a USA-only way to provide minors with a way to own investments. It is a trust fund that is in the minor’s name, however the custodian is responsible handling the investment to benefit the child. The responsible party cannot use the money for their own use. A benefit to UGMA is that the first $700 is tax-free and there is no limit on the amount of the investment.
Strategy #10 – As An Employee, Invest In Your Company’s Stock Options
More and more companies today are offering investments in Stock Options. In the past, stock options were for the wealthy. Stock Options can be a beneficial way to invest by giving the employee the right to buy shares in the company at a designated price over a period of time. Two common plans include Incentive Stock Options (qualified) and Non-qualified Stock Options. Traditionally, employees get the non-qualified and upper management get the qualified and qualify for special tax treatment. Non-qualified, however can be transferred to children or donated to charities. These type of investments have become more popular in recent years but can be tricky with taxes.
Strategy #11 – Research A Company’s Moody Rating Before Investing In That Company
The Moody’s Corporation is a credit rating agency that performs research on government and commercial companies and rates borrowers of credit worthiness. Although the company is subject to criticism it is a good tool to use when making investments. Its ratings are categorized by long-term obligation ratings, short-term taxable ratings, short-term tax exempt ratings and individual bank ratings. When looking for investment opportunities, the Moody Rating allows customers to view how the company is rated. This is essential when looking for safe and secure ways to invest.
Strategies For Your Investments – Conclusion
Preparation is the easiest way to ensure your investments are safe. Nowadays, there are many more options for investing than in past years. While having options is a usually a good thing, too many can be quite overwhelming.
The best strategy is to simply take some time beforehand to research and identify what will best fulfill your investments needs.