What I’m Learning About Investing

08/14/2012

The disclaimer comes first. Don’t take this purely as advice for your situation. Even a lot of people who called themselves “experts” you should be skeptical of, and I’m not expert. With that said, here are my discoveries…

You’ve heard it before: don’t put all your eggs in one basket. I’ve really taken that to heart, seeing the ups and downs of my first stock purchase back in 2008. Recently, I have diversified my portfolio and have also started looking for a place to stash some cash. I know, you’re probably thinking “You can put some cash in my pocket,” but I bet you won’t pay interest.

If you are having trouble saving money to put back for retirement, here is an idea that might help you. If your employer offers direct deposit, have them take out an amount every week that you won’t miss. In my case, that small amount goes straight into a bank that I only have a savings account with and rarely visit. It’s really out of the way, which is great because it’s not so tempting to use that money on a whim for something else. When I reach a goal of $500 or $1000, for example, that money gets invested.

CDs

CDs are a tricky thing these days. Rates are sooo LOW, LOwww, lowwwwwww, but the important thing to remember is that rates are even lower for that money sitting in your savings account. Although you will get a higher interest rate for that five year CD, a lot can happen in that time. Your best bet is probably going to be to lock away that money for two years and search for better rates when that term is almost up. Alternately, if you plan on socking away, say, $1,000 in a CD every year, you could continually set up 5 year terms and, eventually you’ll get to the point where you have a CD term ending every year.

Now, when it comes to IRA CDs, the guidelines are slightly more complex. With that direct deposit money I spoke about, I was going to set up an IRA CD at one of the banks that had a higher yield rate listed on bankrate.com or bankaholic.com (I forget which). With the particular bank in question, I browsed through some reviews and decided to navigate on over to their website to start setting up an account. I think that’s when the Lord Almighty blessed me with a sign… honestly. I filled out all my personal information, clicked “submit” and suddenly lost my internet connection. When it came back, I was like “Okay, I’m going to read a little more and make sure this is the right bank.” It turned out it wasn’t. I discovered some fine print on another page saying they charge an annual $30 IRA account maintenance fee. I was going to make about $10 a year on the two-year CD I was going to set up, so going with that bank would have actually made my retirement account lose $20 a year!


STOCKS

When I first bought stock, I didn’t have the freedom to decide what broker I was going to use. My employer decided that, as I was purchasing through an Employee Stock Purchase Program. The broker is a major one that you’ve heard of, and I like how the system works. I bought the stock when it was at an all-time low in 2008, at less than $1 a share. Knock on wood, but the stock has shot up since then, back to a more normal value for that company. A dividend is paid on the shares every-so-often, and the dividend reinvestment program is awesome. It’s great to periodically check in on your account and discover that you have more stock shares than the last time you logged in.

Automatic dividend reinvestment is great, but some DIY stock brokers like Scottrade don’t allow it. Instead, when a dividend is paid, the money goes into your account. It seems like a ploy to add money to your overall balance, to get you to buy more stock, which means having to pay the $7 transaction fee more often.


IRAs

This is where it starts to get into those murky, giving-specific-financial-advice waters that I am trying to steer clear of. But if you don’t already have an Individual Retirement Arrangement (IRA), they are a smart choice. There are some limitations, but the tax benefits can be great. This year, the maximum contribution limit for most people is $5,000. There are also some income limits to consider. If you’re earning a six-figure income every year, chances are you’re not eligible.

Roth and Traditional IRAs each have their own tax rules but, in my exploration, it seems that most people prefer the Roth. With the Traditional IRA, you can deduct your contributions on your tax return every year, and you pay on your earnings when it’s time to retire. With the Roth, you can’t deduct the yearly contributions from taxes, but the money isn’t taxed at retirement. In other words, for people who can do without that tax break, it’s probably wiser to go with the Roth. Again, though, consult an adviser for your personal situation.

Another thing I have learned is that contributions to your IRA have to be cash, unless you’re rolling another investment vessel like a 401k into the account. Otherwise and unfortunately, you can’t do things like take stock shares in a regular account and transfer them directly to an IRA. Rather, you would have to sell your shares and use the proceeds as a contribution to your IRA. From there, you could buy shares of the same stock again if desired, but that wouldn’t be so wise because of the taxes you would have to pay on the stock sale. I would love to make a hefty profit, then move it to a tax-advantaged account, but it’s just not to be.

That just about sums about my recent discoveries for now. If you have any questions or have your own helpful tips to add, feel free to comment below. Happy investing, and good luck!

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