Investing For Dummies. Eric Tyson

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СКАЧАТЬ trade-offs to reduce your spending and increase your savings rate. Earning more income may help boost your savings rate as well. Perhaps you can get a higher-paying job or increase the number of hours you work. But if you already work a lot, reining in your spending is usually better for your emotional and economic well-being.

If you don’t know how to evaluate and reduce your spending or haven’t thought about your retirement goals, looked into what you can expect from Social Security, or calculated how much you should save for retirement, now’s the time to do so. Pick up the latest edition of my book Personal Finance For Dummies (Wiley) to find out all the necessary details for retirement planning and much more. (If you’re closer to your retirement years, check out Personal Finance After 50 For Dummies, which I co-authored with retirement expert Bob Carlson.)

      INVESTING AS A COUPLE

      Over the years, you’ve probably learned how challenging it is just for you to navigate the investment maze and make sound investing decisions. When you have to consider someone else, dealing with these issues becomes doubly hard, given the typically different money personalities and emotions that come into play.

      In most couples with whom I’ve worked as a financial counselor, usually one person takes primary responsibility for managing the household finances, including investments. As with most marital issues, the couples that do the best job with their investments are those who communicate well, plan ahead, and compromise.

      Here are a couple of examples to illustrate my point. Martha and Alex scheduled meetings with each other every three to six months to discuss financial issues. With investments, Martha came prepared with a list of ideas, and Alex would listen and explain what he liked or disliked about each option. Alex would lean toward more aggressive, growth-oriented investments, whereas Martha preferred conservative, less volatile investments. Inevitably, they would compromise and develop a diversified portfolio that was moderately aggressive. Martha and Alex worked as a team, discussed options, compromised, and made decisions they were both comfortable with. Ideas that made one of them very uncomfortable were nixed.

      Henry and Melissa didn’t do so well. The only times they managed to discuss investments were in heated arguments. Melissa often criticized what Henry was doing with their money. Henry got defensive and criticized Melissa for other issues. Much of their money lay dormant in a low-interest bank account, and they did little long-term planning and decision making. Melissa and Henry saw each other as adversaries, argued and criticized rather than discussed, and were plagued with inaction because they couldn’t compromise and reach agreements. They needed a motivation to change their behavior toward each other and some counseling (or a few advice guides for couples) to make progress with investing their money.

      Aren’t your long-term financial health and marital harmony important? Don’t allow your problems to fester! Remember what the famous psychologist Dr. Phil McGraw says about problems and making changes: “You can’t change what you don’t acknowledge.” I couldn’t agree more with this assessment when it comes to money problems, including investing issues.

      In my work as a financial counselor, one of the most valuable and difficult things I did for couples stuck in unproductive patterns of behavior was to help them get the issue out on the table. For these couples, the biggest step was making an appointment to discuss their financial management. Once they did, I could get them to explain their different points of view and then suggest compromises.

      Determining your investment tastes

      Many good investing choices exist: You can invest in real estate, the stock market, mutual funds, exchange-traded funds, or your own or someone else’s small business. Or you can pay down mortgage debt more quickly. What makes sense for you depends on your goals as well as your personal preferences. If you detest risk-taking and volatile investments, paying down your mortgage, as recommended earlier in this chapter, may make better sense than investing in the stock market.

      To determine your general investment tastes, think about how you would deal with an investment that plunges 20 percent, 40 percent, or more in a few years or less. Some aggressive investments can fall fast. (See Chapter 2 for examples.) You shouldn’t go into the stock market, real estate, or small-business investment arena if such a drop is likely to cause you to sell low or make you a miserable, anxious wreck. If you haven’t tried riskier investments yet, you may want to experiment a bit to see how you feel with your money invested in them.

      

A simple way to mask the risk of volatile investments is to diversify your portfolio — that is, to put your money into different investments. For that to work for you, you need to examine your portfolio’s total value over time and not be distressed when particular investments are lower. Not watching prices too closely helps, too — that’s one of the reasons real estate investors are less likely to bail out when the property market declines. Stock market investors, unfortunately, can get daily and even minute-by-minute price updates. Add that fact to the quick phone call or click of your computer mouse that it takes to dump a stock in a flash, and you have all the ingredients for short-sighted investing — and potential financial disaster.

Funding Your Retirement Accounts

      Saving money is difficult for most people. Don’t make a tough job impossible by forsaking the tax benefits that come from investing through most retirement accounts.

      Gaining tax benefits

Retirement accounts should be called “tax-reduction accounts” — if they were, more people would be more motivated to contribute to them. Contributions to these plans are generally deductible for both your federal and state income taxes. Suppose that you pay about 30 percent between federal and state income taxes on your last dollars of income. (See the section “Figuring out your tax bracket” later in this chapter.) With most of the retirement accounts that I describe in this chapter, you can save yourself about $300 in taxes for every $1,000 that you contribute in the year that you make your contribution.

      After your money is in a retirement account, any interest, dividends, and appreciation grow inside the account without taxation. With most retirement accounts, you defer taxes on all the accumulating gains and profits until you withdraw your money down the road, which you can do without penalty after age 59½. In the meantime, more of your money works for you over a long period of time. In some cases, such as with the Roth IRAs described later in this chapter, withdrawals are tax-free, too.

      The good old U.S. government now provides a tax credit for lower-income earners who contribute up to $2,000 into retirement accounts. The maximum credit of 50 percent applies to the first $2,000 contributed for single taxpayers with an adjusted gross income (AGI) of no more than $19,500 and married couples filing jointly with an AGI of $39,000 or less (these income ranges are for tax year 2020). Singles with an AGI of between $19,500 and $21,250 and married couples with an AGI between $39,000 and $42,500 are eligible for a 20 percent tax credit. Single taxpayers with an AGI of more than $21,250 but no more than $32,500 and married couples with an AGI between $42,500 and $65,000 can get a 10 percent tax credit. This credit is claimed on IRS Form 8880, “Credit for Qualified Retirement Savings Contributions.”

      Starting your savings sooner

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