Making Investment Plans

Step 1: Meeting Investment Prerequisites—Before even considering investing, one should ensure they have adequately provided necessities, like housing, food, transportation, clothing, etc. Additional money should also be used as emergency cash and protection against other various risks. This protection could be through life, health, property, and liability insurance.

Making Investment Plans 1

Step 2: Establishing Investing Goals—Once the prerequisites are met, investors should establish their investing goals, laying out the financial objectives they wish to achieve. The destinations chosen will determine what types of investments they will make. The most common investing goals are accumulating retirement funds, increasing current income, saving major expenditures, and sheltering income from taxes. The Info Blog.

Step 3: Adopting an Investment Plan-Once someone has their general goals, they will need to adopt an investment plan. This will include specifying a target date for achieving a dream and the tolerable risk involved.

Step 4: Evaluating Investment Vehicles-Next up, evaluate investment vehicles by looking at each vehicle’s potential return and risk.

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Step 5: Selecting Suitable Investments—With all the information gathered so far, a person will use it to select the investment vehicles that most complement their goals. One should consider expected return, risk, and tax considerations. Careful selection is important.

Step 6: Constructing a Diversified Portfolio—To achieve their investment goals, investors must put together a portfolio of suitable investments. Investors should diversify their portfolios by including several investment vehicles to earn higher returns and be exposed to less risk than limiting themselves to one or two assets. Investing in mutual funds can help achieve diversification and benefit from being professionally managed.

Step 7: Managing the Portfolio- Once a portfolio is put together, an investor should measure the behavior of expected performance and make adjustments as needed.

Considering Personal Taxes

Knowing current tax laws can help an investor reduce the taxes and increase after-tax dollars available for investing.

Basic Sources of Taxation-There are two main types of taxes to know about: those levied by the federal government and those set by state and local governments. The federal income tax is the main form of personal taxation, while state and local taxes can vary from area to area. In addition to the income taxes, the state and local governments also receive revenue from sales and property taxes. These income taxes have the greatest impact on security investments, in which the returns are in the form of dividends, interest, and value increases. Property taxes can also significantly affect real estate and other forms of property investment.

Types of Income for individuals can be classified into three basic categories:

1. Active Income—This includes wages, salaries, bonuses, tips, pensions, and alimony. It includes income earned on the job and other forms of noninvestment payment.

2. Portfolio Income—This income comes from various investments, such as savings accounts, stocks, bonds, mutual funds, options, and futures, and consists of interest, dividends, and capital gains.

3. Passive Income gained through real estate, limited partnerships, and other tax-advantaged investments.

Investments and Taxes—Understanding tax laws is an important part of the investment process. Tax planning involves examining current and projected earnings and developing strategies to help defer and minimize taxes. Planning for these taxes will help assist investment activities in achieving maximum after-tax returns over time.

Tax-Advantaged Retirement Vehicles- The federal government has established several retirement vehicles. Employer-sponsored plans can include 401(k), savings, and profit-sharing plans. These plans are usually voluntary, allowing employees to increase their retirement money and take advantage of tax-deferral benefits. Individuals can also set up tax-sheltered retirement programs like Keogh plans and SEP-IRAs for the self-employed. Everyone can set up IRAs and Roth IRAs, subject to certain qualifications. These plans generally allow people to defer taxes on both contributions and earnings until retirement.

Investing In the Life Cycle

As investors age, their investment strategies tend to change as well. They tend to be more aggressive when young and transition to more conservative investments as they grow older. Younger investors usually go for growth-oriented investments focusing on capital gains instead of current income. This is because they don’t usually have much for investable funds, so capital gains are often viewed as the quickest way to build capital. These investments are generally through high-risk common stocks, options, and futures.

As investors age, other things like educational expenses and retirement become more important. As this happens, the typical investor moves towards higher-quality securities: low-risk growth and income stocks, high-grade bonds, preferred stocks, and mutual funds.

As investors approach retirement, they usually focus on preserving capital and income. Their investment portfolio is now generally very conservative. It typically consists of low-risk income stocks and mutual funds, high-yield government bonds, quality corporate bonds, CDs, and other short-term investment vehicles.