Saturday, September 13, 2008

Long Term Bucket: Saving and Investing for Growth

You have already maximized your 401 (K), paid all your taxes and expenses, built your short term fund and taken advantage of the Roth IRA. If you still have money left, congratulations! This is when the real growth and wealth building begins.

You can now deposit all your extra money in a brokerage account. You can open a brokerage account in a financial institution like Fidelity, Charles Schwab, Etrade, etc.

Your money will be deposited in a money market mutual fund account, which will earn interest. From there, you can buy or sell stocks, bonds and mutual funds. You can do so online or by calling the financial institution.

Stocks are a more risky option, since you depend only on one company to get a good return. The price of a stock will depend on the expectations of future profits.

With mutual funds your money is divided and invested in many different companies and financial vehicles, so that there is less risk. The possibility of losing all your money with a mutual fund is very low, as are your chances of getting an unusually large return.

If you don’t have a lot of financial experience or time to follow up on your investments, you can invest your money in index funds (for example, the Vanguard 500 index fund mimics the S&P index).

Index mutual funds are cheaper to manage than regular, actively managed mutual funds. As surprising as this may sound, over 85% of actively managed (expensive) mutual funds fail to beat the market.

Bonds are a safer alternative, although the returns are usually lower. A bond is basically a promise a company or financial institution makes, to pay you interest on your money for a certain period of time, after which they will return your principal (the amount you invested) to you.

For more on brokerage accounts and investing for the long term you can read the following links:

What is a brokerage account?

All about mutual funds

Where to invest your money

The Warren Buffet way to invest

For more good information, you can visit the links in our "Resources" section on the sidebar.

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