During the course of your life, you’ll almost certainly have many different financial goals - and to help achieve them, you’ll need to use many different investments.
How might you target specific investments for specific goals? Here are a few suggestions:
• Saving for a home: When saving for a down payment on their first house, many people set up an account exclusively for that purpose, keeping the money separate from other investment accounts. To save for a home, you might want to use certificates of deposit (CDs) or short-term, investment-grade bonds, both of which can help preserve your principal.
• Saving for retirement: To enjoy a long and comfortable retirement, you’ll need to build a substantial amount of financial resources. And you’ll help yourself if you can accumulate those savings in tax-advantaged vehicles. If your employer offers a 401(k) or similar retirement plan, take full advantage of it. Your contributions are generally made with pre-tax dollars, so the more you put in, the lower your annual taxable income. Plus, your earnings can potentially grow on a tax-deferred basis, which means your money may accumulate faster than it would if placed in an investment on which you paid taxes every year. And your 401(k) or other plan may have a dozen or more investment options.
Even if you have a 401(k) or other employer-sponsored plan, you can usually contribute to an IRA as well. A traditional IRA offers tax-deferred earnings, while a Roth IRA can potentially grow tax-free, provided you don’t begin taking withdrawals until you’re 59-1/2 and you’ve had your account at least five years. And you can fund an IRA with virtually any type of investment-stocks, bonds, CDs, etc.
• Saving for college: You can save for college with a Coverdell Education Savings Account or a Section 529 savings plan, both of which can provide tax-free earnings, as long as the money is used for higher education expenses. (Your earnings will be taxable if you use withdrawals for other purposes.) And if you invest in your own state’s Section 529 plan, your contributions may be tax deductible. However, Section 529 plan distributions could reduce your child’s ability to qualify for financial aid. Another possibility to consider is a zero-coupon bond, typically issued by the Treasury under the name of STRIPS. You buy a zero-coupon bond at a deep discount; when the bond matures (which, if you’ve planned carefully, will occur when your child is ready to enter college), you collect the full face value. However, you may have to pay taxes on each year’s interest payments, even though you don’t actually receive them until the bond matures.
• Generating income during retirement: You could spend two or three decades in retirement, so you’ll need a consistent income stream, which you may be able to receive from investment-grade bonds. But to fight the effects of inflation, you’ll also need the potential for rising income, which you may be able to receive from dividend-producing stocks. (Keep in mind, though, that even stocks that have consistently paid dividends can decrease or eliminate them at any time without notice.)
Of course, these investments are certainly not the only ones available to you. But they do help point out the importance of identifying your various goals - and choosing the right investments to help meet them.
Cardella is a financial advisor with Edward Jones in Hinesville.