Washington, DC –
Investing can be easy or complicated. My goal as a Coast Guard Personal Financial Manager (PFM), is to provide basic information to encourage clients to start investing early in their careers since long-term investing may result in a much larger overall benefit. Compound interest is defined as earning interest on previously earned interest. So the more previously earned interest you have, the more your account grows. Compound interest works best when it has a lot of time to work its magic.
I’m often asked, “Where should I invest?” The best answer I can provide is “It depends.” Your goals and risk tolerance determine where you should invest your money and/or which tools or vehicles you should consider. Typically, short-term goals should be funded using savings tools and long-term goals should be funded using investing vehicles. Long-term goals are goals you are hoping to accomplish in five years or more. Investing vehicles are perfect for long-term goals because they give you the potential to accumulate more money (remember compound interest?) and beat inflation, but investing is not without risk (which is why we recommend using safer savings tools for short-term goals).
That’s right, investing can be risky! The Securities Investor Protection Corporation (SIPC) protects consumers of SIPC-member broker-dealers if the firm fails financially (up to $500,000 for securities and $250,000 for cash), but SIPC does not protect investors if the value of their investment declines. That means you have to make smart decisions about where you invest in the hope that your higher risk comes with a higher return.
We can’t skip past inflation without explaining what it is and why we want to beat it. Inflation is simply the cost of goods getting more expensive over time. For instance, according to the USDA, the average price of a gallon of milk the year today’s newest Coast Guard recruits were born was $2.84. 18 years later, the average price is $3.58. That increase may not seem like a lot, but it adds up when you realize that milk isn’t the only thing that got more expensive over those 18 years. You’ll need the higher returns that can potentially come with investing to hedge against inflation.
So what are the investing vehicles for long-term goals?
Cash Equivalents: Money Market Funds (in a brokerage account)
These are typically the holding spots for money that isn’t invested in your brokerage account. They often have a low rate of return and are low risk. You’ll probably want to move your money out of this holding spot and into an investment pretty quickly to get your money working for you.
Fixed Income: Bonds and Bond Mutual Funds
Bonds are issued by governments or corporations when they want to raise money. By buying a bond, you are buying the debt or loan security and the borrower promises to pay back the loan with interest at a specific time. Bonds are typically stable and provide steady cash flow. This stability can be important as you near the time when you plan to use the money or if you have a low risk tolerance. Bond Mutual Funds are a mix of many bonds. They allow you to get the benefit of diversification, the benefit of a professionally managed fund (so you don’t have to do the research alone), and are easier to purchase. Diversification is investing in many assets, industries, and companies versus relying on one asset, one industry, or one company. Have you ever heard “Don’t put all your eggs in one basket”?
Equities: Hard Assets, Real Estate, Stocks, & Stock Mutual Funds
Equities are risker than bonds, but that risk comes with a higher potential for growth over the longer time frame. If you have a longer time period before you plan to use the money or if you have a high risk tolerance, you might consider equities. Hard assets include investing in tangible assets like diamonds, rubies, gold, silver, etc. Real Estate investing includes buying properties that you flip and sell, buying properties that you rent to others, joining a Real Estate Investment Group (REIG), and investing in Real Estate Investment Trusts (REITs). Stocks represent ownership of a company or owning a piece of a company. When the value of the company goes up, stock prices go up. If you invest in a company when the stock prices are at $5 a share and then you sell your investment in that company when the stock prices are at $50 a share, you’ve made a profit. You can also earn money while owning shares of a company if the company decides to distribute dividends. Dividends are a way for a company to return profits to their investors or shareholders. Stock mutual funds are a mix of many stocks. They allow you to get the benefit of diversification, the benefit of a professionally managed fund (so you don’t have to do the research alone), and can be less expensive to purchase. Mutual funds do not trade on the stock market, but assets inside them do. Fund value is determined at the close of the trading day and is called Net Asset Value (NAV). Also important to note are investments called Exchange-Traded Funds (ETFs). ETFs are investments that track a mix of equities and thus are similar to mutual funds, however, they are traded on the stock market like a normal stock and their price adjusts throughout the day.
Risk tolerance was mentioned several times and is measure of how much risk you are willing to accept when investing. Are you willing to accept more volatility (changes that occur rapidly and unpredictably) in exchange for the possibility of higher growth without losing sleep or do you need less volatility with lower expected growth to sleep well at night? The higher your risk tolerance, the more volatility you are willing to accept.
You might be wondering, “How do I get started with using these investing vehicles?” You have a couple of options and again your goals will help to determine the answer.
Taxable Brokerage Account
A taxable brokerage account is an excellent investment tool or vehicle to use for mid to long range non-retirement goals or retirement goals once tax-advantage accounts are fully utilized for the year. You can open a taxable brokerage account online for free or you can get help from a professional for a fee. FINRA BrokerCheck is a good resource to ‘background check’ an investment company or financial advisor before depositing money into a brokerage account. Once the account is opened, you fund the account and choose your investments.
Individual Retirement Account (IRA)
IRAs are good for money you will be using after 59.5 years of age and unlike a taxable brokerage account, they have tax benefits. The catch is that you have a contribution limit. You can contribute up to $6000 (or $7000 if you are turning 50 or older) total to your IRAs for 2021. Just like a taxable brokerage account, you can open an IRA online for free or you can get help from a professional for a fee. Once the account is opened, you fund the account and choose your investments. There are a number of important rules to follow when investing for retirement such as contribution limits, amounts and income phase outs, so it is important to consult with a tax professional if you have questions.
Thrift Savings Plan (TSP), 401(k), 403(b), or 457
Employer retirement accounts such as TSP, 401(k)s, 403(b)s, or 457s are good places to invest money intended to be used in retirement years and like IRAs, they have tax benefits and a contribution limit. You can contribute up to $19,500 (or $26,000 if you are turning 50 or older) total to your employer retirement accounts for 2021. If you have TSP and joined under the Blended Retirement System (BRS) or the Federal Employees Retirement System (FERS), then you should have a TSP account established and available to invest a percentage or portion of your salary in. If your TSP wasn’t automatically started, you’ll need to visit Direct Access or Employee Personal Page (EPP) to get it started. Once you open the account, you will need to visit TSP.gov to choose your investments. More information about TSP will be provided in a future MyCG article.
Hopefully this discussion will encourage you to create your investing goals, do more research and get started on your investment journey today (since we don’t have a magic time machine to start yesterday).
Resources:
- For additional help, reach out to your nearest Personal Financial Manager (PFM) located at each Health, Safety, and Work-Life Regional Practice (HSWL-RP).
- CG SUPRT offers onsite classes, webinars, online tax filing, and telephonic money coaching sessions under their Personal Financial Wellness Program; for more information, visit www.CGSUPRT.com or call 1-855-CG SUPRT (247-8778).
- For additional information and resources for the Personal Financial Management Program, please visit their website.
About the writer:
Sarah Rohrer is an Accredited Financial Counselor® and the Personal Financial Manager (PFM) for Regional Practice Cape May in District 5. Sarah has been working as a PFM for eight years and has been a Navy spouse for 13 years. During her free time, she enjoys spending time with her three daughters, conducting ancestry research, playing Sudoku, and using spreadsheets (especially budget spreadsheets). Sarah can be reached at 609-898-6886 or sarah.s.rohrer@uscg.mil.