Cash Investing 101
So you have managed your money wisely and have some cash reserves at your disposable. Your desire is to “grow” these reserves by investing. I commend you for both! Yet, you have never invested your money in the past and are not sure where and how to get started. Well, relax and take a deep breath, because it is not that difficult to quickly determine the “where” to start. 401k’s and IRA’s are perfect investment accounts that provide the beginning investor a simple, low risk opportunity to start investing and take advantage of a great cash management technique. And one of the places you can start immediately,may be available to you at the place you go everyday, your workplace.
A 401k is a company/employer sponsored retirement plan that will allow you to deduct a portion of your paycheck each month and put it towards your retirement. This money earns interest and is tax free. That is one of the ways that a 401k allows you to grow your money. Here is the other: many companies will match or contribute a portion of the amount you put in your 401k. This is free money that you will also be earning interest on. How are you able to earn interest on this money? Companies like the one you work for, that participate in 401k programs outsource the maintenance of your account to mutual fund companies, financial services corporations, and banks. These companies will in turn invest your money in stocks, bonds, and other money market instruments.
Once established, a 401k is yours to keep until you retire at age 65. If you leave the company where you set up the 401k, you have a couple of options. One, you can withdraw the money and close the account which would involve early withdrawal and tax penalties. Or two, you could transfer, or “rollover”, the account to an IRA.
An IRA is an individual retirement account that you can set up separate from the company you work for. It can be started on it’s own, separate or concurrent with a company sponsored 401k. There are two types of IRA’s you can invest in-Traditional or Roth. What is the difference? A traditional IRA allows you to contribute pre-tax income. This means any money you contribute will not count as income on your tax return. You will have to pay taxes on the money you withdraw once retirement rolls around. A Roth IRA works in a directly opposite manner. Money you contribute to this plan will count as income on your tax return but can be withdrawn and received tax-free when you retire. To set up an IRA you simply need to contact a financial adviser in the field of investments. He or she can help you set up either a Traditional IRA or Roth IRA and further explain which plan would be right for you.
Congratulations! If you start a 401k or IRA you have employed one of the best cash management techniques available to you. Pat your self on the back for not only saving enough money to invest but for also taking free cash advice.