Planning your financial future or investing for your children’s education can be difficult. With the prices of college tuition, health insurance, medical costs, energy costs, and other life essentials rising dramatically, merely setting future financial goals can be difficult. Meeting these goals can seem to be a mountainous task. However, with a little planning, investing for the future can not only be easy, but also keep your family in the clear from financial risks.
The Importance of Planning Ahead
Investing sooner rather than later will make achieving future financial goals significantly easier. As the principal investment capital gains interest, the interest that is accumulated will also begin earning its own interest. Compound interest is a valuable asset for those looking to invest for the long term; $10,000 invested at a five percent rate of return for 18 years until a child reaches college age will result in $24,066.19 even without any additional contributions on your part. Investing the same amount for half that time at the same rate will net investors only $15,513.28.
Small additional contributions over time can also add up. Adding $500 per month to the aforementioned $10,000 investment over 18 years will grow that figure to $192,860.50, which will usually be sufficient to pay for most of college. Contributing as much as you can as early as you can will make meeting your future financial needs much easier.
Bumps in the Road
While you can plan for most things in life, there are always going to be those unforeseen “bumps in the road,” such as accidents, potential disabilities, and even periods of unemployment. While these situations seem frightening to even the most prepared of parents, having a game plan can ensure that your family experiences minimal problems from it. Take the time to investigate your insurance policies and exactly what they cover in the event of an accident, fire or other damage. This is particularly important when it comes to your home. Meeting with your insurance agent to go over potential pitfalls and to make sure you have the coverage you require is a great idea to make sure you and your family will be in the clear financially.
Interruption in your employment status can happen for a multitude of reasons from simple lay-offs and closures to post-accident disabilities that prevent you from carrying on with your job. To investigate more information on disabilities and your rights, websites such as www.disabilitydenials.com are great for research. Check your coverage on credit cards and insurance policies to see what options you have in case you are unable to work. Additionally, supplemental insurance is a great idea for families, and can offer you more protection in such an event.
No Free Parking for You
Some people simply use savings accounts to save money for the future. Many of these accounts offer a dismal rate of return; most savings accounts will only return a fraction of one percent to the account holder. Even a highly conservative portfolio could beat that. However, some people are so risk averse that they would prefer to park the money in an account under the theory that the money will always be there, as the Federal Deposit Insurance Corporation will insure it up to the $250,000 limit.
Unfortunately, even parking money carries risk. Inflation occurs when the prices of goods and services rise over time. Even though the dollar amount will be the same, the money will be worth considerably less. Prospective savers who simply place money into a bank account or under the mattress will have to increase their savings by around two to four percent per year just to have the same buying power that they had last year. To achieve investment goals, the money must be invested, not parked.
Diversification, Risk, and Sensible Investments
Investment capital should be divided over different types of investment vehicles within a well-diversified portfolio. This is done to hedge against fluctuations in different markets. If an investor has invested exclusively in stocks and the stock market takes a large plunge, the investor stands to lose significant amounts of capital; however, if the investor split his or her investments between bonds, commodities, mutual funds, and some direct stock holdings, the investor has relatively little exposure.
The amount of investment capital available, the investor’s acceptable risk levels, and the investor’s liquidity demands will dictate how the money is invested. As a baseline consideration, the investment capital available can make certain investments impractical or even foreclose the investor’s options altogether. For example, trading fees will eat up the gains from an underfunded stock account while some financial institutions will require significant financial resources to obtain certain types of bonds.
The acceptable risk level is usually the primary consideration for investors. All investments will inherently entail some risk, but some investments are riskier than others are. Treasury bills, AAA-rated corporate bonds, and index funds are reasonably safe investments while futures, commodities, and over-the-counter securities usually entail much more risk. With greater risk usually comes a greater potential gain. Each investor must determine his or her acceptable level of risk.
Liquidity and Your Investments
Liquidity is another concern. Liquidity refers to the ease with which an asset can be sold quickly and with minimal disruption to the investment portfolio. This can be important as someone who invests as much as possible as quickly as possible may be faced with an unexpected expense, such as medical emergency or job loss. Disability and unemployment benefits will usually take some time to begin and rarely compensate the recipient for everything. Accident victims without workers’ compensation coverage or health insurance can be left with massive medical bills due immediately; lawsuits may be an option for innocent victims, but legal action can take months or even years to settle or receive a judgment.
If the investor has no money on hand to pay these bills, the unfortunate circumstances may require the investor to withdraw from his or her portfolio. Some assets, such as stocks, can be sold very quickly at full market value; other assets, like real estate, may require selling at well below market value in order to sell quickly. Investors without liquid assets on hand may wish to think twice before investing in illiquid assets; having a high net worth is no consolation when you do not have money to keep the power on.
Planning for the future will necessarily entail risk. Seemingly safe investments like treasury bills and municipal bonds carry some level of risk and even doing nothing will see inflation eat away at any type of savings. Investors who are looking to invest significant amounts of capital and who do not understand the different types of options available should consult a financial advisor from a reputable financial institution. Additionally, ensure that the portfolio meets your liquidity concerns.