Choosing which investments are right for you is a complicated decision. This checklist will help you choose the right savings and investments for all of your financial life goals by help you assess potential investment opportunities and avoid the money mistakes.
You should only consider investing if you’ve payed off any high-cost debt and you’ve got a sufficient emergency fund built up.
Here are some of the considerations you should make before jumping in to any long-term investments:
- How much could you put into this investment?
- Is the investment part of an employer-sponsored plan?
- What are the tax implications of this investment?
- How easy can you access your money if you need to?
- Can this investment help you achieve your financial life goals?
- What will the investment (and any related advice) cost?
1. How much could you put into this investment?
The amount of money (over your emergency fund) you need to start depends on what you invest in.
Investing in real estate, for example, requires a large sum of money up front to cover your down payment, recurring mortgage payments, closing costs, and more. On the other hand, you can begin contributing a modest account to a 401k or other retirement advantaged retirement account.
On the flipslide, there may be limits on how much you can pay into tax advantaged plans and on who can pay into them. Check to make sure that you’re eligible to invest in the financial product (or strategy) you’re considering; that you have enough money to get started and that you don’t exceed any maximum investment limits.
2. Is the investment part of an employer-sponsored plan
Whatever form they take, investments that are part of an employer-sponsored plan often have additional benefits that can make the investment a good idea. These benefits may include:
- Money your employer pays into your retirement plan, on top of any personal contributions.
- Discounts on the price of shares in your employer through an employee stock purchase program.
- Free shares given to you by your employer under a share incentive plan or as part of your compensation package.
Check to see if any of these options are available to you by speaking with your employer or consulting your employee benefits portal.
3. What are the tax implications of this investment?
While taxes shouldn't be the primary reason you decide to move forward with an investment, it makes sense to take advantage of opportunities to manage, defer, or lower taxes. Here are a few questions to help you test the tax benefits of any investment:
- Is the investment part of a tax advantaged account?
Tax-advantaged accounts are generally grouped into two categories: tax-deferred or tax-exempt. Tax-deferred accounts, such as traditional IRAs and 401k plans, provide an upfront tax break. You pay taxes when you withdraw your money in retirement—so the tax is "deferred." With tax-exempt accounts, including Roth IRAs and Roth 401k plans, contributions to these plans are made with after-tax dollars, so you don't receive the same upfront tax break that you do with traditional IRAs and 401(k)s. However, your investments grow tax-free and qualified withdrawals in retirement are tax-free as well.
- Is the investment tax efficient?
Some investments are more tax-efficient than others. Among stock funds, for example, tax-managed funds and exchange-traded funds (ETFs) may a be more tax-efficient option because they trigger fewer capital gains than actively managed funds. Municipal bonds are very tax-efficient because the interest income isn't taxable at the federal level, and Treasury bonds and Series I bonds (savings bonds) are exempt from state and local income taxes, making them tax-efficient options as well.
Taxation is a big subject and different people have different tax saving needs. So, professional advice can be valuable in this area, especially if you’re already optimizing your retirement savings.
4. How easy can you access your money if you need to?
With a good emergency fund, you shouldn’t need short-term access to your longer-term investments. But you may want to keep some of your investments accessible in case of a significant change in your life. And your accessibility check comes in two parts:
- First, check how your chosen investment accounts restrict your access to your money.
Retirement accounts have different rules around when and how you can access your money, and there may be penalties for withdrawing early,
- Second, check how quickly you could sell the assets you’re buying – if you needed to?
It may be obvious that real estate could be difficult to sell for the price you expect if home prices are crashing at that time, but the same may go for other assets in your portfolio as well.
5. Can this investment help you achieve your financial life goals?
Check that the investment you’re considering gives you access to the right types of investment asset (or funds) to help you achieve your specific goals.
For long-term retirement savings you may want to choose stock market based funds for their real long-term growth potential and to cut the cost of that goal. Most employer-sponsored retirement plans offer this.
For a shorter-term goal – like saving up to buy a home – a money market account or certificate of deposit (CD) might be fine for you.
And if you’re considering mortgage-backed property investing, you need to beware of the “gearing” risk on
your money – because it can wipe out your investment or even land you in debt if property prices fall heavily.
Matching your investments to your attitude to risk (and your capacity for it) is essential for your investing success.
6. What will the investment (and any related advice) cost?
There’s no point putting money into an investment to earn a return over a bank savings account if a large part or all
of your extra return is then eaten up in product, fund and adviser charges.
So, check the total effect of all charges on the investment you’re considering, and seek professional help if you're having trouble doing so.