Key Considerations When Planning Your Financial Investments

Posted on: 6 October 2017

Even if you rely on the expertise of a financial adviser, its' important to have good money management skills and a knowledge of basic investment principles. You can sock away more for your retirement years or other financial goal on your list by spending less and saving more. However, it helps to educate yourself some about financial investment services and the investment products you choose.

Investment Diversification

Diversifying your investments is the best way to increase the return on your money and minimize the level of risk. But keep in mind that higher return investments come at higher risk.

Depending on your personal financial situation, it may make more sense to put your money in both high- and low-risk investments, as well as a mix of short- and long-term investments. You should also include assets, such as real estate, that you can liquidate quickly for cash if you need it.

Short-Term Investments

If your goal is to have a steady and predictable flow of income when you retire, consider putting your money in fixed-income investments such as money market accounts, Treasury bonds, certificates of deposit (CDs), and exchange traded funds (ETFs). Fixed-income investments generally are lower risk than company stocks and the principal is guaranteed.

Long-Term Investments

Although investing in the stock market can be risky, you can earn high returns on your investments. Holding on to stocks for the long term gives the investment time to accrue value. Stock market fluctuations aren't all bad news either. Time gives your investments the opportunity to recover from drops in the stock market.

Besides, if you start investing early, you give your money more time to grow. Longer-term investments have the advantage of compounding your returns. With compounding, you not only earn returns on your initial investments, you earn returns on those returns. History also shows that generally long-term investments pay off.

Separation of Needs From Wants

Consider your needs and wants when determining how to allocate your assets. It takes discipline to regularly put aside money for investing. To start, you must be honest with yourself and separate spending money on what you need from spending it on things you think you have to have.

Chances are you have expenses you really don't need. On the positive side, cutting out unnecessary expenditures gives you extra cash that you can put into a retirement account or other investment vehicle.

Tax Benefits

You can maximize the return on your assets by considering the positive financial consequences, particularly the tax advantages. For example, unlike short-term gains, the capital gains from long-term investments aren't taxed as regular income. Instead, they are taxed at a lower rate and perhaps even at zero percent depending on your ordinary tax rate.