You already know why you want to save—you want to put your money to work making more money. But in a world full of choices, the decision of how and where to invest can be less clear.
Establishing guidelines that you can consult when you consider adding an investment to your portfolio is a tactic that may help.
Here are five basic questions to help get you started.
How much time do I have? Vacations or new vehicles are short-term savings goals, and may call for different investments than longer-term objectives such as college or retirement.
What is this investment’s liquidity? Liquidity is a measure of how easily an investment is turned into cash. How much liquidity you need depends on your goals. For example, if you’re saving to buy a car within the next six months, investing in a money market account or certificate of deposit may make more sense than purchasing real estate.
What are the risks? Assess the possibility of losing your money against your personal comfort level. In addition, take into account your other investments. Why? Some investment risks may offset others, reducing the overall volatility. As an illustration, stocks may provide little current income but have the potential for longer term appreciation, while bonds can offer current income but little or no appreciation of your capital. A mix of both can help balance your portfolio.
What is the yield? Yield is a measure of how much you’re earning on your investment. Calculating the yield gives you an idea of how the investment is performing so you can compare it to others or to the market as a whole.
What are the tax consequences? Uncle Sam favors some investments by taxing them at lower rates. For instance, under current law, certain qualified dividends are subject to reduced rates, but interest income does not enjoy the same benefit.