Best Ways to Invest Money in 2021

Best Ways to Invest Money in 2021

 Don’t fall into the trap of thinking that investing is reserved for the already rich.

Although having more money to play with makes investment simpler and less risky, anyone with a healthy savings account and enough income to set aside a few dollars each month can afford to invest. So don’t ask yourself whether you should get involved — try to figure out the best ways to invest money.

Unfortunately, there’s not a simple answer to that question. We all have drastically different financial goals and mindsets; one person’s foolproof plan is someone else’s recipe for disaster. In the advice that follows, I’ll outline the main factors to consider when starting on your investment journey, along with the best approaches for different situations.

What to Consider First

Most people want to jump straight into figuring out the hottest new investment opportunity, thinking that if they select the latest up-and-coming cryptocurrency or stock that they’ll be guaranteed tidy profits.

But this is the wrong approach — before you even think about what you want to invest in, you should turn your mind toward how you want to invest. New and experienced investors have investing rules for success

Lost? I’ll break things down into five questions you should be asking yourself:

  1. What are your financial goals?
  2. What’s your investment timeframe?
  3. How much risk are you prepared to take on?
  4. Do you want to select your investments yourself?
  5. What type of account is right for you?

Let’s look at each one in turn.

Financial Goals

We’d all like to have more money. But what exactly do you want it for, and how much are you going to need? Knowing the answers to these two questions is the foundation for building a solid financial strategy.

While investing your savings instead of leaving them sitting in a checking account will (almost) never be a bad idea, this method will be less effective if you don’t have a clear picture of what you’re heading toward.

Common financial goals include:

  • College tuition (or the college tuition of your children)
  • Retirement
  • Paying off a mortgage
  • Making a downpayment on a property

As you might have noticed, all the objectives above are longer-term goals that involve some serious saving over multiple years (if not multiple decades).

Although some people save for shorter-term milestones, like a wedding or vacation, investing is generally only recommended if you’re prepared to lock away your money for five years or more. I’ll be assuming most people reading this are in that category.

Next, you’ll need to figure out exactly how much you need to meet your goal(s).

For example, if you’re saving for retirement, start by working out how much annual income you’d need to live off. Many people in the financial independence movement recommend following the 4% rule (multiplying your annual income by 25).

Like mortgages and college tuition, other goals are easier to associate with a number for — but don’t forget to account for inflation. If college tuition costs $20,000 a year now, expect it to be a little more expensive in ten years.

Timeframe

Once you know your financial goals, it should be pretty straightforward to figure out the kind of timeframe you need to be investing over.

If you’re saving for your kids to go to college and the eldest is currently four years old, you’re looking at a time frame of 14 years. Or, if you’re 30 years old and saving for retirement, expect a horizon of roughly 35 years (assuming you want to retire at the “normal” age).

You get the gist.

Risk

The timeframe you decide on is one of the greatest determinants of how much risk you should take. For example, investing $100 in Bitcoin or Tesla shares is pretty risky if you know you’ll need to use that money in two weeks — maybe the market will just so happen to be experiencing a dip at that point, meaning you’ll lose money.

Take a look at the price chart of any stock, crypto, or currency pair, and you’ll know how volatile prices can be in the short term.

But if you know that you’re in it for the long haul and won’t need the money for a few decades, you can be reasonably confident that your investments rise in value by the time you withdraw them.

Naturally, there’s always a chance that a company could go under or lose value — that’s where diversification, research, and some thought about your risk tolerance come in.

If you invest all your money in a single company or asset, there’s far more risk involved than if you spread it across multiple companies or assets.

Then there are the investments that are inherently riskier than others. For example, pouring your money into a brand-new company or a new asset class like cryptocurrencies involves far more risk involved than putting your trust in a “safe pair of hands,” such as the Googles and Amazons of the world.

Anything with inherent value, like real estate in a desirable area, is also a decent option.

Still, risky investments aren’t necessarily a no-go — you need to make sure you’re going into them knowing and accepting their riskiness.

Investment Selection

You might be thinking, haven’t I already covered investment selection in the paragraph above? Not quite — investment selection here is all about deciding whether you want to handpick your investments or pass that responsibility onto someone else.

If you’re new to investing, you might find the idea of enlisting a professional to help you select your investments more appealing than having to do everything yourself. However, while this can be a good option, it comes with a fee — portfolio managers charge a management fee, which eats into your returns, especially if you’re only investing a modest amount.

But if you’ve never invested before, you probably don’t even know what you don’t know — how can you hope to pick the right platform, never mind the right assets and products?

Fortunately, there’s a third option: using a Robo-advisor. Many platforms and apps have launched special software and applications that guide investors through selecting and managing their portfolios. The sophisticated algorithms bring suggestions that rival actual asset managers.

Some will take users through a quiz with questions about their risk tolerance, financial goals, and similar; others provide tools for automatic investing and rounding up spare change to make investing effortless.

Account type

Figuring out what you want to invest in is just the first step — you also need to know exactly how you’re going to do it. Or, in other words, which account type you’ll open and on which platform.

In the US, common investment accounts include:

  • 401(k): A tax-efficient retirement plan allowing employees to save part of their paycheck, often involving matched contributions from employers.
  • Traditional IRA: An account that lets you contribute after-tax money and withdraw it tax-free (along with the extra earnings) at retirement age.
  • Roth IRA: An account lets you contribute pre-tax money and pay tax when you withdraw it at retirement age.

Tax-effective investment accounts and pension plans exist in many other countries, but they’re likely to have different names and involve slightly different rules. For instance, the UK offers individual savings accounts (ISAs), which allow individuals to save up to a set threshold each year and later withdraw the funds they’ve accumulated tax-free.

You might also want to consider accounts for specific savings goals, such as an account for saving for college (known as a 529 account in the US) — these can offer special perks.  

Best investments in 2021

Now you’ve given plenty of thought to the questions outlined above. It’s time to get on to the juicy part of the article — selecting suitable investments.

There’s not a single correct answer here since the right investments for you will depend on your answers to the questions outlined above — that’s why I’ve highlighted who each of the investment types below is most suitable for. Let’s go!

Stocks

Best for: Longer timeframes and higher risks for higher returns.

When you buy a stock, you essentially become a shareholder (or owner) of that business — so whenever the company increases in value, your investment will also rise in price.

You only have to look at how much some of the most successful stocks have grown over the last few decades to see how profitable this can be. For instance, if you’d invested in a Google stock back in July 2016, its value would have jumped from $719.85 to $2585.72 — an increase of around 259.2%.

That’s a whole lot better than stowing it away in your savings account and even better than investing in the S&P 500 (which achieved a return of around 100% over the same period).

Source: https://finance.yahoo.com/quote/GOOG/

Yet, although stocks can be a path to mouthwatering returns, they can also end in tears. If you purchase shares in a company that happens to go under, you’ll lose your entire investment. And even if a firm doesn’t go out of business entirely, it could lose a lot of its value, even over the long term — industry trends, technology, and customer opinion can suddenly render a profitable business less than desirable.

This isn’t likely with a business as dominant as Google, but there’s no way of knowing for sure what’s going to happen tomorrow.

Luckily, there’s a solution.

Mutual Funds

Best for: Longer timeframes and lower risk.

If you like the sound of the returns and liquidity that stocks can bring but not the high risk and the need to handpick your investments, I’ve got great news: you can opt for a fund instead. Funds let you invest in a mix of different company stocks, therefore offering increased diversification.

They don’t tend to achieve the same level of returns as the highest-performing stocks — but they’re far less risky.

While it’s reasonably likely that a single company could face tough times, it’s far less likely that thousands of companies will experience these same difficulties (other than during recessions, but these are a natural part of the economic cycle and nothing to be scared of).

There will be some high-performers and some low-performers (or non-performers) in any fund, but on average, you’ll still get good investment returns. As long as you’re willing to invest for long enough, that is.

The main types of funds available to investors are:

  • Mutual funds: Contain a selection of bonds, stocks, and other assets (e.g., real estate or commodities) picked by asset managers and pooled together with other investors’ money. Traded at the end of the day.
  • Index funds: Contain an index, like the S&P 500 or the FTSE 100, and are traded throughout the day (just like stocks).
  • ETFs: Contain an index but are traded at the end of the day, just like mutual funds.

The differences between these are subtle but worth noting. For those who want less risky exposure, consider a fund of dividend growth stocks or dividend aristocrats as the yield often anchors the investment.

Bonds

Best for: Shorter timeframes and lower risk.

Although I said I’ll focus on investment strategies for longer timeframes and goals, an article about the best investments wouldn’t be complete without giving an honorable mention to a top short-term investment option: bonds.

Bonds are essentially loans, with the borrowers usually being the government or large companies. Because of who you’re lending to, the risk associated with bonds is low, yet this also means that the returns are lower than other types of assets.

The exact returns you can expect depend on the type of bonds you opt for and who the borrowers are — some bonds are unable even to beat inflation, while others can earn up to 5%.

Bonds are often used in funds to hedge against risk since they’re less affected by the stock market swings.

However, if you want to invest over a larger time period, it’s generally agreed that the benefits of investing in bonds are minimal. If you know you’re not going to access your funds within the next few years, the cons of low returns will outweigh the benefits of increased security.

Real estate

Best for: Portfolio diversification and stable returns.

I want to address something right away. Although I just said that real estate offers stable returns, this isn’t true all of the time. Properties have inherent value — people will always need somewhere to live — so their prices will generally increase over time.

But real estate doesn’t always match the returns seen in assets like stocks, and if you choose the wrong property location, you could fail to achieve much of a return at all. However, as a big advocate myself, I wanted to explain why it can be such a great option.

For one, the gains can beat the stock market if you choose the right area. Just look at how much property prices in London have increased over the last few decades!

Source: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/january2021

If you purchase a property and then rent it out to others, it can also be a great way to generate income and make your money work for you — you can use your investment to finance even more investments by using rent payments toward the future down payment.

Still, money invested in real estate is less liquid than anything in the stock market. It carries some serious risk — you might have issues with tenants or face expensive maintenance operations, for instance.

Cryptocurrencies

Best for: High risk and high returns.

Last but least, we have cryptocurrencies. This certainly isn’t an option for the faint-hearted — it’s no secret that the crypto market is somewhat wild, and you need a clear strategy for the price swings. Just look at how much the value of Bitcoin has fluctuated in the last year alone.

Source: https://finance.yahoo.com/quote/BTC-USD/chart/

But if you’re prepared to take on some risk to earn higher returns — often even higher than anything you could achieve from investing in stocks — then the world of crypto is the way to go. For example, if you’d bought into Bitcoin five years ago, you’d have achieved a return of 5144.33% by now — and the coin is currently way below its all-time high.

Just be prepared to do some serious research before you start investing in this one. Following the crowd could lead you to buy into a bubble at the wrong time, whereas buying niche coins at random could involve you in a scam (the crypto world is unregulated for the most part).

Beware!

It’s Decision Time

As you should realize by now, choosing the best investment vehicle(s) for you is a personal decision. For example, some people are happy to accept significant risk by investing in specific stocks or cryptocurrencies. In contrast, others would prefer to sleep at night knowing their money is (relatively) safely locked away in index funds or property.

I’d recommend doing a mixture of all the above. It’s good personal finance practice to have a good amount of liquid cash at hand, and it’s safest to invest the rest of your funds across a range of assets or investment types. Why not invest the bulk of it in something safer like an index fund but allocate a smaller percentage to something riskier with higher potential returns, like crypto or individual stocks?

Final Thoughts

Whether that idea fills you with boredom, fear, or excitement will say a lot about your risk preferences and what your next step should be.

This post originally appeared on Your Money Geek.

 

What Is an LLC? And How Is It Different Than a Corporation?

What Is an LLC? And How Is It Different Than a Corporation?

I know a thing or two about the complexities of launching a new business. As the owner of several businesses in the Los Angeles entertainment industry, I know from experience that you’ll have a quadrillion questions.

Difference Between a Corp and an LLC

 

 

 

 

 

 

 

You should take notes like this dude.

And one of the initial questions you’ll certainly need to ask is, “What is an LLC, and how does it compare to a corp?” Then naturally, your next question will be, “So…which one should I set up?”

Most “movers and shakers” need to pick between establishing a corporation (aka Inc.) or a limited liability company (aka LLC). This can be a tough decision, largely because it’s difficult to understand the differences (let alone which might benefit you more)!

DISCLAIMER: I want to quickly stop and say that I am not a CPA or Attorney. I am an entrepreneur that has started multiple companies and other entities for real estate purposes. So what I write here is what I have learned for myself over the years (much of which was from my CPA and attorney). Before you make your final decision on what to do for your company, please consult your own CPA or attorney!

Now, before we look at some of the more important factors that differentiate the two, let me first answer the question of…

What is an LLC?

An LLC, or limited liability company, is a legal business entity you form to protect your personal assets from liability. It will also establish how your business income is treated come tax time.

It’s not the only business entity that does this, though. It’s one of a handful.

What is a corporation?

The other most common option is a corporation (aka a corp or Inc.). Corporations are another business entity that also provides liability protection. But, they are set up a little differently from an LLC.

They are an entirely separate entity from their owners, who hold ownership through shares (or stock) of the company.

What are the differences between an LLC and a Corp?

These two business entity options have some similarities and, of course, differences. Choosing between the two will depend on your business type and needs and your own liability and tax planning goals.

Ownership

An LLC is typically either owned by one person or a small group of co-founders. But technically, an LLC doesn’t have “owners”; it has “members.”

The governing rules of an LLC are spelled out in an “operating agreement.” Additionally, it’s worth noting that all members can manage the LLC (aka “member-managed”), or one designated member can manage it (aka the “managing member”).

Meanwhile, an Inc. effectively belongs to the people who hold shares in it, and the company management is accountable to those shareholders. Because a corporation is very distinct from its shareholders, a shareholder can sell their stock to someone else, and the company can continue doing business fairly seamlessly.

This is why most private investors will want to have the entity be a corp rather than an LLC. And eventually, if the company grows and goes public, that step will be much easier.

Liability Protection

One reason why making your business an LLC is worthwhile is because, as the name “limited liability company” suggests, it creates a barrier between the business activity and the member’s personal assets from a legal standpoint. Any debts it accrues will not fall to you to repay should it encounter legal issues, for example. (Unless, of course, the debts are personally guaranteed.)

That said, an Inc. pretty much offers the same liability protection that an LLC does, especially for an Inc. owned by one person or spouses. This information comes from my long-time attorney, by the way, so you can rest assured it’s accurate.

In the end, they both will protect you similarly if the company gets sued. However, if you personally get sued, an LLC might be better. Why? If you personally get sued (say from a car accident), and you lose, the suit can take ownership of the stock of your Inc. and consequently control over any assets. Yikes.

Now, if you have an LLC, a winning suitor can’t take ownership of your share of the LLC. They can get a charging order to garnish your income from the LLC, but you can remain in control of what income you get. Bonus for the LLC!

Paperwork

One of the common issues discussed when deciding between an Inc. or LLC is the amount of paperwork hassle you have to undertake.

Generally speaking, LLCs indeed have less paperwork, particularly because it doesn’t have to hold “annual meetings” of the directors and take meeting minutes. It also does not have to issue “stock certificates” to its members.

It’s also true that a single-member LLC doesn’t have to do payroll or even file a tax return (because all profit is taken on the individual owner’s “Schedule C”. Now, that would be beneficial; except that, as you will see below, it comes at a relatively high financial cost.

So, if you make your LLC an S corp to save on taxes, you will have to, in fact, do payroll and file a tax return for the entity. But again, that still does leave the LLC/S corp with fewer paperwork hassles overall.

Tax Treatment

Tax savings used to be the most important deciding factor between an Inc. and an LLC. Oddly, since both can be classified as C corps and S corps for tax purposes, they can be pretty much the same. But let’s take a closer look…

Tax Shelter 58b8df423df78c353c241d1e

 

 

 

 

 

 

 

A little corporate tax humor for ya!

Federal Taxes

Just as independent contractor taxes are applied on the basis that this is personal income, the same status is relevant if you generate income from an LLC as a sole owner. In plain English, a single-member LLC does not have to do a tax return. Instead, the net income goes right on your personal return on the “Schedule C.”

Multi-owner LLCs will be taxed as partnerships, which means the entity does have to file a tax return. However, the net income still passes through directly to the members’ personal return; only it’s in the form of a K1.

In both of these cases, being the profit of the LLC is passed directly onto the members, the entity itself pays no taxes. Thus, this is a so-called “pass-through entity.”

Furthermore, in both cases (specifically of LLCs), those profits that are passed through are subject to “self-employment tax” (of an extra 15%) on the personal return. It’s the same for 1099 income as well. This is very important to note! (More on this below.)

NOTE: K1s are the tax document a company owner will get at the end of the year to represent the income they received from the company. It’s similar to the W2 that an “employee” receives or 1099 that a freelancer would get.

On the other hand, corporations are taxed as if they were an entity in their own right. Revenues gained through sales are considered the equivalent of income earned by individuals.

A  “C” corp earns money, has expenses it deducts, pays federal (and often state tax) on the net income. It does not “pass-through” to the shareholders. That said, you can make an Inc. a pass-through entity by giving it an S corp election (see below).

A tax on profits and dividends will also apply. If you are a shareholder, the dividends, in particular, will be taxed twice since they are not deductible (which is why people often avoid C corps).

This rule encourages owners to inject cash back into the business rather than extracting it as it grows (to avoid this double taxation). In addition, this means that the C corp does not have to pass on the profits if it doesn’t want to. Instead, it can just keep them and reinvest them back into the company.

State Taxes

Now don’t think you are out of the tax woods yet! Your state will want to get its hands on some tax as well, most likely.

There are actually two types of state tax you may run into. First, you have tax on “net profits,” which you would commonly refer to as “income tax.” But again, income tax will only be paid by a C corp (or a non-pass-through entity).

That said, some states also have a “privilege tax” (which can also often be called a “franchise tax” or “minimum business tax”).

The privilege tax is just that. A tax for the privilege of doing business in that state. This tax is often based on the gross revenue of the company, with a minimum amount imposed.

NOTE: The privilege tax percentage may be the same for both LLCs and Inc.’s, but often it’s different…yah! I have found that the privilege taxes imposed on LLCs are often higher than that of INCs. But it varies state by state.

To confuse matters a bit more, most states also require you to file an “annual report” where you update them on any changes (or lack of) that have happened with your entity. Unfortunately, with this report, you usually pay a fee.

In some states, the annual report fee is one-in-the-same as the privilege tax. In others, you may have no privilege tax, but you have an annual fee. To confuse matters more, in some, you have just a privilege tax and no annual fee! Aye, Yai Yai!

Suffice it to say, you should do some investigation on this. You can check out my post about Annual S Corporation Filing Requirements for All 50 States, where I lay much of this out!

S Corp (Tax) Status

At some point, it became possible to give your corporation (which by default is a “C” corp) an “S” corp designation. This basically makes the corp a pass-through entity. But an S corp exists only as a taxation option rather than as a specific type of entity.

Now it’s true that this means all profits are no longer taxed at the corporate level but passed through to the shareholders. HOWEVER, being that in a corporation, the (active) owners are also considered employees, you have to do some amount of payroll for the owners.

The common practice (for single-owner entities) is to give yourself a percentage of your profits in the form of “W2 Salary” and the rest as profits. What that percentage is, you have to figure out with your CPA, of course. But this is also a crucial tax distinction (more on this below).

This practice can also be useful in preventing the full profits of a business from being taxed if you are only taking a small proportion of this as income.

Interestingly, it’s possible for LLCs also to request to be classified as an S corp by the IRS. In the case of an LLC classified as an S corp, the owner is considered an employee (just like in an Inc./S corp).

So rather than simply equating the income and expenses of the organization to personal income on their tax returns (i.e., on their “Schedule C”), they must take part of their profits in the form of a W2 salary.

Effectively, both LLCs and corporations can be classified as S corps if they wish, although there are some restrictions. For example, an S corp cannot have over 75 shareholders, and everyone needs to be a resident within the US.

The CRITICAL Self-Employment Tax Distinction (for an S corp) **VERY IMPORTANT**

Ok, this is one of the MOST IMPORTANT things to know in all of this bologna! A little ways back, I wrote that…

1) An LLC passes through all the profits to the members and then has a 15% “self-employment tax” imposed.

Well, the reason this is the case is that the fed and state want to get some money for social security, medicare, and UI. But being you don’t receive W2 payroll, they don’t collect it through your paycheck. Instead, they collect in the form of a self-employment tax.

2) I also said that an S corp considers the owners “employees,” which requires you to pay yourself via a W2 paycheck…and is therefore taxed via employment taxes.

HERE’S THE THING. With an S corp, you only have to pay yourself “reasonable” compensation in the form of W2. Commonly this is considered to be somewhere between 40-60% of your profits, but it could be more, and it definitely depends on what your CPA advises.

The remainder of your profits come to you from that K1 that I mentioned earlier. BUT, for whatever reason, that K1 income is NOT SUBJECT TO SELF-EMPLOYMENT TAX. Thereby saving you money in taxes!

Here is a tax calculator I made illustrating how the tax savings can potentially work. But again, you do have to check with your CPA to see if you and your business can capture these potential tax savings.

tax calc sm 1

 

 

 

 

 

 

 

This calculator will show you the difference in taxes you will pay when making income as a W2 employee, a 1099 contractor, or as an S corp. Again, it’s just an estimate. Check with your CPA about your specific situation!

Now, if you are interested in getting your hands on this calculator, you can do so by checking out my free course on Incorporating Your Business.

Some other semi-important random points about the entities

  • LLCs can have INC/C corps, INC/S corps, LLC/S corps, LLCs, and people as members.
  • S corps can only have individuals (or a living trust) as a shareholder.
  • S corp can change back to C corp, but you have to wait 10 years to switch again once you do that.
  • Per my CPA: Except for medical write-offs, S corps are usually more tax-favorable.
  • Per my CPA: Statistically, S corps get audited the least of all entities.
  • If you have losses on a C corp, no one benefits, as it does not pass through. However, losses are passed through to the owners for S corps and straight LLCs.
  • Customers are required to send Single-Member LLCs and Partnership LLCs 1099 forms. But, they don’t have to send 1099 to an INC/C corp, INC/S corp, or an LLC/S corp. You are on the honor system for those entities in terms of reporting your income to the IRS.

Which is right for you?

For small businesses, becoming an LLC (with an S corp election) could be the best option, particularly if the organization is small and is aiming to minimize the complexity of its tax affairs while still protecting the owners from unwanted legal ramifications.

But again, you should double-check the state-based taxes for LLCs before going that route. I personally feel that the INC/S corp is the best way to go for individual owners or spouses. That’s what I do, but I can’t tell you what to do. You have to decide for yourself.

Growing firms with several owners who are looking at the option of becoming a corporation, but do not want to commit to being a fully-fledged C corp, should consider the advantages of S corp status. You can even go back to being a C corp if you need to.

This post originally appeared on Your Money Geek with their permission.

Thanks for reading! Please visit The Cents of Money for more articles of interest.

Safe Investments With High Returns

Safe Investments With High Returns

Are you looking for ways to have an additional income stream aside from your day job? Why not try investing your money? If you are hesitant because of the risk, there are safe investments with high returns for you to try. 

In an ideal world, investors look for investments that provide high returns and low risk. However, investments with high returns are often associated with increased risk and vice versa.

For investors to get the highest returns possible, investors need to take risks. That is challenging for inexperienced investors.

That is why you should match your risk profile with the product or company you consider for investment. That way, you can build yourself a money-making machine that will earn you continuous income.

To help and guide you in making the right choice, here are the best safe investments with high returns.

16 Best Safe Investments With High Returns

Here are some of the safe investments options with high returns that you can look into that would fit your risk appetite.

1. High Yield Savings Accounts

One of the investment options with the lowest risk is a high yield savings account. The Federal Deposit Insurance Corporation (FDIC) insures your money up to $250,000 as long as the deposit is in an FDIC-insured entity.

High yield savings accounts are great if you’re saving up for something big or if you’re temporarily storing the cash you earned with your high-income skills.

While a savings account isn’t necessarily an investment, you can earn a modest interest rate without risking your money.

One of the best savings accounts is with CIT bank. The bank has a competitive interest rate for most of its products. Their Savings Builder account pays interest of 0.40% APY. Remember that the interest rate may change according to the market condition.

2. Certificates Of Deposits

Certificate of Deposits (CD) are closely related to the savings accounts but have higher interests. The FDIC also insures Cds. That means they are practically risk-free.

Their advantage is that they are usually very liquid.

A CD requires an investor to commit to investing their money for a certain period ranging from one month to 10 years. If they access the cash before the period is over, they are penalized. You get compensated for the loss of easy access to your money with a better interest rate than your average high yield savings account.

3. US Savings Bonds

US savings bonds have one of the lowest investment risks. The US treasury issues the securities to fund the government’s operations. Saving bonds have a fixed rate of interest.

They can be divided as follows:

  • Series EE Bonds. These have a fixed rate of interest for a maximum period of 30 years. Their interest rate is usually set bi-annually, and therefore, you are assured of the amount of interest that the bond can accrue. These are usually long-term investments, and investors are penalized for redeeming them early.
  • Series 1 Bonds. These earn an interest based on a combination of a fixed rate and inflation rate. The fixed interest rate is usually set after buying the bonds, while the inflation rate is generally adjusted after every six months. These bonds have a five-year maturity period, and investors who withdraw before the maturity period is over are penalized.
  • Government Bonds. Government bonds represent debt that a government issues as a way to support its spending. Interest comes in a periodic payment over a set period of 1 to 30 years, with which you can have a steady stream of income.

4. Money Market Accounts

Money market accounts are closely related to savings accounts and CDs. They often have a better rate than the savings accounts but have more liquidity than CDs.

You might be allowed to write checks or use debit cards with the accounts, providing greater flexibility.

However, you are limited to six transactions a month in a money market account. When you exceed this, you will pay the penalty. Money market accounts are a good investment option for investors with money they might use infrequently or those who need a little flexibility with their savings accounts.

5. Municipal Bonds

Municipal bonds are loans issued to local governments by investors. These are usually a good option for better returns with slightly higher risks than savings accounts, CDs, or saving bonds.

There are no chances of the US government defaulting, and there are a few cases of major cities filing for bankruptcy. But like you would guess, it’s extremely rare for a major city to file for bankruptcy, and likewise, cases of municipal bond default are rare.

6. Money Market Funds

Money market funds are a kind of mutual fund investing in short-term debt instruments, cash, and cash equivalents. Money market funds or money market mutual funds offer a low level of risk with pay-out in the form of dividends.

Do not confuse money market funds with money market accounts, as these are two different things. Money market funds are sponsored by an investment fund company, while financial institutions offer money market accounts.

Money market funds provide investors with continuous income while protecting their principal investment.

7. Annuities

Annuities are simply insurance contracts. You pay a certain amount of money today, and you get a stream of income in the future. That is why annuities are best suited for retirees looking for a guaranteed income for life.

Annuities may be fixed or variable. With a fixed annuity, you will receive a fixed return on your investments, while in a variable annuity, your investment may fluctuate depending on the market. So the value tends to go up or go down.

Since annuities are an insurance product, guaranteed returns still depend on the insurance company’s health where you bought the annuity. Even presented with that risk, many individuals still accept that annuity can bring stability to their portfolios.

8. Investing In High Dividend Stocks

Many companies make dividend payouts to their shareholders quarterly, semiannually, or yearly. It’s possible to achieve some good returns by investing in companies that pay high dividends. However, you should ensure that you buy stocks in companies that make consistent dividends payments.

It would help if you considered the dividend yield of the company before making a buying decision. Also, find a big company with a long history of financial stability and low volatility. You might want to consider the elite dividend aristocrats group (NOBL) with the most reliable income. 

9. REITs

Real Estate Investment Trusts (REITs) are a good way of spending money in real estate without investing thousands of dollars as a property owner. REITs provide a dividend that is above average and generally offers good returns over time as the value of property increases.

Begin by researching REITs that buy property in an area of interest. When you’ve earned some money, for example, through flipping things for profit, you can use that to start investing in REITs.

The majority of REITs are registered with the SEC and listed on the public exchanges. These are publicly traded REITs. On the other hand, private REITs aren’t registered with the SEC and aren’t listed on a public exchange.

10. Real Estate Crowdfunding

With real estate crowdfunding, you pool together money with other investors to invest in properties. When an investor identifies an investment opportunity, they may not have the ability to execute the project.

There are usually three players in crowdfunding real estate. These are the sponsor who plans and looks at the entire investment, the platform where the sponsor seeks investors and the investors who contribute capital in exchange for a part of the profit.

Becoming an investor in a real estate crowdfunding project can provide some good returns even though it has a substantial element of risk.

11. Corporate Bonds

Just like governments, corporations also issue bonds to fund their expansion plans. When you buy a corporate bond, you lend money to the issuing company that, in turn, commits to pay interest on the initial capital plus interest on maturity. Corporate bonds have bigger interest rates than government bonds. They offer investors the ability to invest in different sectors with an option to cash out before maturity.

While this is a relatively safe investment, it also has an element of risk. Compared to treasury bonds, corporate bonds are riskier, as corporations experience bankruptcy more often than governments. However, if you stick to the blue-chip public companies, it’s possible to stay safe.

12. Exchange Traded Funds

One of the downsides of the stock market is that it is very volatile, and the possibility of losing your investment is always present. One of the reasons that keep people out of the stock market is that they fear losing their investment.

Fortunately, Exchange Traded Funds offer investors a good diversification option. Exchange-Traded Funds, or ETFs, is a basket of investments that you can buy and sell on an exchange. ETFs are traded similarly in the same way you trade shares of stock. ETFs shares are traded daily in which prices can change depending on the supply and demand and stock market hours.

Unlike mutual funds, ETFs require less minimum investment than mutual funds. So, if you don’t have enough money yet, you can go for ETFs since they provide many different assets and offer a diversified portfolio for investors.

13. Peer-To-Peer Lending

Peer-to-peer lending (P2P) is when you have enough cash and lends it to a borrower against a good interest. Individuals choose to borrow money from P2P instead of a traditional bank since it is a more accessible funding source than a conventional financial institution.

P2P lending generally provides high returns for the investors, and it will also diversify your investment portfolio. However, this kind of investment is not secure, especially if the borrower defaults on their loan. It is important to know the different levels of risk associated with the loan, so you know what to expect and how much risk you can take.

14. Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities (TIPS) can be a great hedge against inflation. While they pay lower interest than what the normal treasury bills of the same length pays, the principle increases or decreases in value depending on the prevailing inflation rate.

TIPS can be an excellent option for investors with money they may not need before the bond’s maturity. The FDIC insures any deposits up to a total of $250,000.

15. Growth Stock Funds

Growth stock funds invest in a wide range of growth stocks instead of the single growth stock. This ensures that the risk of a single growth stock falling and hurting the whole portfolio is low.

With this investment option, you don’t need to evaluate and choose individual growth stocks. Instead, the fund is managed by expert managers who select particular growth stocks.

Growth stocks are a good choice for diversifying your portfolio. They are highly liquid, and you can put in or remove your money as you wish.

16. Rental Housing

One of the best long-term investment strategies is the buying and holding of real estate. It’s especially a good choice for buy-and-hold investors who would like to build wealth before retirement. For example, Grant Cardone’s net worth was mostly built through real estate investing.

Inflation benefits the rental housing market as it increases the value of the asset. In many neighborhoods, homes usually appreciate at 1.5 times the rate of inflation. While the capital of investing in a housing property is high upfront, you will not lose your whole investment since it’s a physical asset. This is why real estate is a high return but lower risk investment.

The only downside of a rental property is that it’s among the least liquid investments. If you would like to recoup your cash, you will need to sell. Luckily, keeping the property is one of the best ways of generating passive income.

Conclusion – Best Safe Investments With High Returns

When you’re investing, there is always some risk involved. But to grow your money, you need to take some risks.

Educating yourself manages the risks involved in investing your money. So, do your research when investing in these products, and you will be able to reap the rewards consistently.

The key here is understanding what investments are available to you and which one best matches your risk appetite. Always remember that successful investing is about managing risk and not avoiding it. So tread carefully and enjoy your investment ride.

This post originally appeared on SavoTeur

Thank you for reading! Please visit The Cents of Money for more articles of interest.

 

Ten Commandments of Saving Money

Ten Commandments of Saving Money

“Do not save what is left after spending, but spend what is left after saving.”

Warren Buffett

Warren Buffett’s quotes are timeless, reflecting his wisdom. His words on saving and investments are inspiring. Saving money is the cornerstone of a sound financial plan. Through discipline and hard work, we can save money to reward ourselves with financial flexibility. By making saving a priority and making your money work for you, you are more likely to achieve financial success.

Key Reasons To Save Money

  • Help to achieve our financial goals.
  • Pay our bills on time and entirely, so we don’t need to carry costly debt.
  • Provide an emergency cushion for unpredictable costs.
  • Set aside funds for our children’s college tuition and our retirement.
  • Make investments, the best way to build wealth.

I like to revisit ancient views of saving money from timeworn texts and stories. There is a common thread across varying beliefs on saving, avoid overspending, and investing for a better financial future. Surveying these words adds a different perspective on finances. In the companion Ten Commandments of Personal Finance, we look at home ownership, investing,  retirement, and debt management.

Ten Commandments of Saving Money:

 

1. Spend Within Your Means

Saving money is an essential financial habit. According to a CareerBuilder report, 78% of American workers are living paycheck-to-paycheck.  Even those with higher incomes of at least $100,000 (nearly 10%)  are having trouble making ends meet.

I grew up in a modest household that saved diligently. As a young girl, I didn’t always understand why we were having financial problems. My mom reminded us often that our needs exceeded our wants, and we had to be careful about spending. Later on, I learned that my parents set up a small retail business that took a long time to get off the ground. Savings became part of our mindset from then on.

Control thy expenditures.”

To set aside money for saving and investing, you may need to cut some costs. To control your expenses, assess what your necessary living needs are. These are predictable monthly fixed costs such as mortgage payments or rent, property taxes, utilities, car loans, typical grocery bills, credit card payments, and any expenses you pay monthly. Remember, these costs are for our needs rather than for our wants and desires.

Be reasonable about satisfying your every want. A rise in earnings may not fully accommodate every gratification we seek. For example, that 10% raise on your $80,000 salary may not significantly help you to buy that luxury car (or chariot in ancient times), you have been eyeing.

 

2. Build A Healthy Emergency Fund

As a result of the coronavirus pandemic, record jobless claims caused a dramatic slowdown of the economy. Although federal stimulus packages have added to state unemployment benefits, there is no guarantee this government aid will be ongoing. 

 Economic downturns are cyclical events you can’t time. They cause substantial financial stresses. Recessions remind us of the need for savings on hand. Having an emergency fund is necessary to pay for basic living expenses for at least six months, if not a year. Having readily accessible funds in liquid funds such as money market securities helps you avoid borrowing money.

Joseph’s Emergency Funds

Emergency funds as a prudent strategy appear in Genesis 41:34-36. In this passage, Joseph interprets Pharaoh’s dream about seven fat cows grazing by a river swallowed up by seven skinny cows. Joseph views the seven fat cows as seven prosperous years for Egypt, followed by seven years of famine. As a result of planning for this disaster, Joseph advises Pharaoh to store grain during the good years to use for more challenging years. Save when you have more for those times you have less due to job loss, illness, or crisis.

Adopting a habit of saving more provides you with more flexibility to allocate into investment and retirement savings. Begin by setting aside small amounts of savings of $1,000 but don’t stop there. Tough times prove that amount is inadequate. Don’t think of these savings as wasteful assets. Instead, it is a means to avoid higher debt levels. As Proverbs 13:11 tells us, “Dishonest money dwindles away, but whoever gathers money little by little makes it grow.”

Having Liquidity is Key

Liquidity refers to your ability to quickly convert assets into cash with little to no loss of principal. When your resources are liquid, you have the financial ability to pay for unexpected costs such as a loss of job, death in the family, or your roof is leaking. Monitor your liquidity levels periodically. 

Monetary assets are among the most liquid of holdings. These assets include cash, cash-equivalent securities or money markets, treasury bills, savings bonds, savings, and checking accounts. True, you won’t earn much income as interest rates are still low, but you avoid having to use your credit cards with borrowing rates in the mid-teens.  Use liquid assets to support your fixed monthly expenses for six months or more. Here are two benchmarks to use:

Liquidity Ratio= Monetary Assets/ Monthly Expenses

Your monetary assets should support your fixed monthly expenses such as groceries, rent or mortgage, utilities, and a car loan for six months. A ratio of 6 means having six months of monetary assets to pay for your basic needs of food, rent, utilities, and car loan, if necessary.

 Emergency Fund Ratio

The liquidity ratio is linked very closely to emergency funds. This ratio is essentially a cash fund for emergencies in unforeseen events such as job loss, death in the family, unexpected surgery, or immediate house repair. It works by using a targeted number of months that you believe is ample to support you through emergencies. If you are looking for six months or higher (and this is highly recommended) to set aside money in a high yield savings account or money markets account, then:

Emergency Funds Ratio= 6*Monthly Expenses

This ratio will give you a targeted amount of monetary assets needed to be comfortable for a possible emergency. If your household generates less predictable income, you need to set aside more than six months for a more significant cushion. You can use personal finance ratios as benchmarks to see how you are doing.

3. Pay Yourself First

Start thy purse by fattening

George S. Clason, who wrote The Richest Man in Babylon, is believed to have coined the term “pay yourself first.”  That means you should put away at least 10% of every paycheck into savings. Start to save small amounts working your way up to 20% of income to allocate into retirement savings investment accounts. You can distribute the initial savings to an emergency fund amounting to at least six months’ coverage for essential living costs. Unforeseen events are unpredictable and undesirable but do your planning.

Once establishing this fund, use some savings stashes to invest for retirement and taxable investment accounts. Putting away some money may be difficult at first, depending on your spending habits.

Savings should be one of the most essential parts of your household’s financial goals. Adopt a “Pay Yourself First” attitude. Your monthly budget should call for savings to be at least 10% of gross income.

Savings Ratio = Savings/Gross Income

Savings refer to money in the bank, liquid funds, deposits, money markets, and other liquid funds, such as your emergency fund. Gross income is your total source of income on your budget and includes what you earn, side businesses, bonuses, dividends, and interest income.

Your savings rate should be at least 10% of gross income. It may be challenging to do when you first start to work. As your salary or what you make rises, it should get easier to put money away for savings. A healthy savings ratio of 20% would be a bonus (pardon the pun).

4. Track Your Spending By Budgeting

Spending more than your means is a bad recipe that leads to borrowing more. It is far more profitable to save money and allocate to investments that yield 5% returns or more than having to borrow at mid-teen rates with credit cards to pay for your overspending habits. “Whoever works his land will have plenty of bread, but he who follows worthless pursuits will have plenty of poverty.” (Proverbs 28:19).

Track your spending carefully by budgeting according to your priorities. Bava Metzia 42a instructs us, “A person should always divide his money into three: one-third in the ground (for the future), one-third (invested) in business, and one-third in possession.” That may be an ancient way of splitting your funds. There are several ways to budget, such as tracking your expenses, creating a monthly budget, or using the 50/30/20 rule. The 50/30/20 budget uses 50% of aftertax or net income for your needs, 30% of net income for your wants, leaving 20% for saving money and paying off debt.

Budget In Any Reasonable Manner

Budget in any reasonable way that allows you to control your spending. It is easier now than ever to track your spending using various (free or fee) apps such as Mint, Personal Capital, PocketGuard, and YNAB for zero-based budgeting.  Alternatively, scrutinize your credit card bills and build your own excel spreadsheet.

Our spending changed dramatically during the pandemic. Our bills for grocery and household goods were higher than usual. On the other hand, we saved more from cutting out retail shopping, dining except for occasional outdoor places, hair salon appointments, gas, tolls as we stayed closer to home. While I appreciated the extra cash, I like the return to normal, even as Covid cases are rising.

5. Avoid Lifestyle Inflation

As our income grows, we often increase “essential costs,” leading to lifestyle inflation. While we are allowed the occasional latte and extravagant dinners, we need to keep our spending in check. You shouldn’t deprive yourself of everything. However, fulfilling every desire is no longer a special treat.

“Keeping up with the Jones”  and conspicuous consumption often refers to material goods we may accumulate to fit within a particular social class we admire.  We compare ourselves to our neighbors or colleagues at work.  As a result, people fall into the trap of spending on a better car or house simply to enhance their prestige and social standing. Targeting social status may be costly and divert resources better used for investing your money for more incredible long-term wealth.

It is pretty common for people to spend their raise and bonus as soon as they receive it. Temptation runs high to buy something special upon getting a raise and bonus after a year of working hard. I often bought something special to reward myself for hard work. However, you soon realize your pay hike is pretax and shrinks on an after-tax basis. If you need some things, make a list of what you believe is essential if you had some extra cash.

Overspending And Materialism

Overspending leads to materialism and lifestyle inflation that is hard to maintain. Mishlei Proverbs 13:7 tells us, “There is one who feigns riches but has nothing; one who feigns poverty but has great wealth.”  According to Psalms 128:2 “You shall eat the fruit of your effort–you shall be happy and it shall be well with you.” This text reminds me of another favorite book, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko.

Stanley and Danko profiled and compared millionaires in two categories: those under accumulators of wealth (UAW) and the prodigious accumulator of wealth (PAW). The UAW’s were individuals who had a low net wealth compared to their high income because of spending to maintain their status. On the other hand, PAWs managed their wealth better, often living in blue-collar neighborhoods and buying used cars. It is an eye-opening account of the good and bad money habits of the wealthy.

 6. Bargain hunting or Shopping Addiction?

Shopping is often a fun activity to do with friends or on our own. Marketing experts count on our emotions when we shop. Be aware of the biases we wear when shopping. Retail expert Mark Elwood has written about the psychological benefits of seeing bargains. He points out that stores like Best Buy use Goldilocks pricing or three-tiered pricing from low to high prices. The store hopes you will buy the middle option with higher pricing than the low-end but not necessarily feature-worthy enough to pay more.

We should not pay the list price for anything but make sure it is a real bargain. There has been a lot of worthwhile academic research about bargain hunting being a form of shopping addiction. 

There is the thrill of getting a deal,  even when we may not want that item.

Impulse Shopping vs. Compulsive Shopping

Overspending can cause financial difficulties if you are subject to impulse or compulsive shopping. There is a difference between the two though often seen interchangeably. Impulse buying happens more frequently when a consumer has a sudden urge to buy on the spot without much deliberation. We all do this from time to time. Compulsive buying, on the other hand, happens where one experiences an uncontrollable urge to buy. We may trigger negative feelings relieved by that purchase. This kind of shopping may be more like a shopping addiction that potentially needs therapy before financial hardship occurs.

7. Compounding Growth

Start saving for retirement in your 20s through your employer’s sponsored 401K plans. Deposits in small amounts in retirement accounts regularly benefit from tax advantages and compound growth over a long horizon. Automate these savings out of your paychecks. As such, your contributions are tax-deferred. Employers often match a portion of your contributions. Match contributions are extra money you can earn from your company. Separately, establish an IRA (Roth IRA) for further retirement savings. Target your contributions to amounts capped by the IRS for maximum growth for retirement. Avoid withdrawing from these accounts as you may then trigger penalties and taxes you will need to pay.

As a goal, try to contribute to your 401K plan to the maximum level, which is $19,500 in 2021.  Some years it may be hard to do, especially when you are experiencing a job loss. Resist withdrawing money from your retirement account as there is usually a 10% penalty and taxes to do so before you turn 59.5 years. Withdrawing retirement money will put a dent into your retirement fund that will be painful longer term.

One of my favorite quotes in The Richest Man is this: “It behooves a man to make preparation for a suitable income in the days to come, when he is no longer young, and to make preparations for his family should he no longer be with them to comfort and support them.”

Compounding Works Best When Investing Early

The power of compounding interest, linked to the time value of money, will benefit you the most if you save and invest early. Let your earnings accumulate and grow rather than withdraw cash from your accounts. It makes a big difference if you start saving for your retirement ten years later than your friends or if you invest for ten years and then stop contributing to your 401K retirement account. It is difficult to catch up by doubling the amount if you start investing later on.

As soon as your child is born, start saving for college through a 529 plan. These plans vary but are available in virtually every state. Like retirement accounts, they have deferred tax benefits and may have contribution limits. Check with your respective state program for details.

 8. Make Savings A Priority

Saving money is hard work and not necessarily natural for many of us. To make it a good habit, take steps to automate your savings. Most banks will allow you to automatically transfer a set amount of money from one account to another account. Your employer will be able to automatically deduct a percentage or a set amount of your paycheck to deposit into accounts such as retirement or investment accounts. Essentially, you are adopting a “pay yourself first” attitude so that you can allocate money into different buckets, especially for unforeseen expenses.

In recent years, there have many headlines about insufficient savings by Americans for years. As the outbreak of the virus caused lockdowns, most of the country stayed home. The personal savings rate rose dramatically to an unusual 32.2% in April 2020 as consumer spending dropped significantly. Over time, it will likely come down to the more normal 7%-8% range. Spending versus saving is a common trade-off with lots of tension. Motivate yourself to save by setting short-term and long-term goals proactively. Reduce spending you can’t afford. Money trade-offs require you to consider the best balance for you and your family.

Saving As A Good Habit. How Long Does It Take?

I had always heard that it took 21 days to break a bad habit. As a member of Weight Watchers, which is ALL about breaking bad eating habits (and it works for me as I am down 30 pounds and declining!), they always refer to the 21 days. However, I did not know of the 21-day origin.

Dr. Maxwell Maltz, a 1950s plastic surgeon, found that it would take his patients about 21 days to get used to seeing their new face, or post-amputation, they would still sense a phantom limb. The 21-day time frame dates back to nearly 70 years. Dr. Maltz wrote about his adjustment period to changes and new behaviors to form a new habit….”.it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell.”

More research indicates that it takes a longer time to form a new habit than 21 days. A 2009 study published in the European Journal of Social Psychology by Phillipa Lally, a health psychology researcher at University College London, indicated it took 66 days on average (in a range of 18 days to 254 days) to form a new habit.

Whether 21 days or 66 days, it takes significant time, effort, and determination to create a new habit

What About A Savings Challenges?

I have been skeptical about savings challenges. Like diets, they work for many and can be fun, especially if you do so with others. The question is whether the challenge can result in having long-term effects. I think any challenge that can motivate someone towards a good habit with lasting results has my endorsement. There are so many good savings challenges to consider. I tend to favor the 52-week challenge, which may help you build some money along with good habits. On the other hand, the no-spend month reminds me of a fasting diet and seems too difficult to attempt for most people with families or busy lives.

I often have turned to using cash only and leaving my credit cards behind. Paying for meals at restaurants or window shopping without cards has rewarded me by limiting my consumption to cash. I am not a big shopper or enjoy going into stores unless I am going purposefully for a specific outfit or electronics. My daughter, Alex, is often upset with me, encouraging me to buy something for myself. She wonders why I don’t love shopping as much as she does. Now that she is working two jobs that she loves this summer, she has become quite a hoarder herself and has asked me about my stock picks. (Okay, I am proud of her!).

9. Don’t Obsess About Money

Maintain balance in your life, and don’t just focus on wealth accumulation. According to Proverbs 21:20, “Precious treasure and oil are in a wise man’s dwellings, but a foolish man devours it.”  While no one seeks to become poor, there are dangers of solely wanting to be rich. “Keep your lives free from the love of money and be content with what you have.” Hebrews 13:5

Martin Luther King Jr. worried about the obsession with money in his famous speech called False God of Money. He said, “We attribute to the almighty dollar an omnipotence equal to that of the eternal God of the universe. We are always on the verge of rewriting the Scriptures to read, ‘Seek ye first money and its power and all these things will be added unto you,’ or ‘Money is my light and salvation, what shall I fear.”

King himself lived frugally, leaving little money for his family. However, he saw other goals like working hard, investing in education and having faith as far more critical.

Price Versus Quality

Being financially secure is important. The alternative is stressful. However, don’t be frugal for frugality’s sake. Consider price versus quality in your buying considerations. The cheapest thing may not be of the best value. Indeed, there are some items where quality doesn’t differ, and I  will pay the best price. I like buying private label products such as Kirkland sold in Costco, discounted from the branded items.

However, quality matters more when buying furniture, mattresses, a car, or a home. We have been burned by looking to get a bargain and not balancing quality. Buying solely on a price basis is foolish for these products or services that I intend to use for a while. That doesn’t mean I am averse to getting a bargain by negotiating.

10. Be Charitable

According to Jewish law, one cannot impoverish oneself by distributing all of one’s wealth to charity. However, one can leave one-third of his estate to charity in their will. A minimum of one-tenth of one’s income belongs to God per measure handed down from the Patriarchs as Jacob himself said to God, “Of all that You give, I will set aside a tenth to You” (Genesis 28:22). Giving 10% of your net income a year is a virtual goal—those who can.

According to HW Charles in The Money Code: Become A Millionaire With The Ancient Code, “Those who love people acquire wealth so they can give generously, after all, money feeds, shelters and clothes people.”

We should strive to be as generous as possible to those in need.

Final Thoughts

I found inspiration from timeless scriptures when writing this article.  Sometimes ancient words remind us that money management was always a challenge to overcome.  Choose success by your actions in saving money. 

Thank you for reading our post. Please let us know your thoughts. We love feedback. If you found some things of value, please visit The Cents of Money for other articles on our blog. Consider subscribing so you can get freebies.

 

Estate Planning For Digital Assets In 5 Steps

Estate Planning For Digital Assets In 5 Steps

We Live In A Digital World

Yet, most of us don’t prepare wills (only 46% do, according to a recent poll), and if we do, we may not fully address these assets in our estate planning documents. As a result, a more significant proportion of our net worth is in our digital assets. Simply defined, a digital asset is content stored in a digital format that provides monetary or sentimental value.

Estate planning for our digital assets follows a similar process as planning for the distribution of our physical assets, but there are unique challenges. The legal landscape is still unsettled, outpaced by technological advances that produce a myriad of digital assets.

Take banking, for example. If we do our banking online exclusively, there is no paper trail for our loved ones to easily locate these accounts after we die. Getting access requires security questions and passwords that may not be readily available. Historically, we could find the latest financial statements to guide us to the assets at the bank.

Types of  Digital Assets We Own

  • Content, including images, books, logos, illustrations, photos, videos, documents
  • File-sharing and cloud accounts
  • PowerPoint presentations, Excel, Word, and Google documents
  • Digital tokens (i.e., cryptocurrencies and country-created coins)
  • Non-fungible tokens (NFTs)
  • Licensed domain names for websites and their blog content
  • Digital rights to intellectual property, including music, film, theatrical rights
  • Email, apps, and online community accounts
  • Social media accounts such as Facebook, Instagram, Twitter, Pinterest, and LinkedIn
  • Online bank, financial, and utility accounts
  • Seller’s accounts on Amazon, Etsy, and eBay
  • Online Gaming and betting, such as DraftKings
  • eSports Teams
  • Digital backups to important documents that were scanned (e.g., birth certificates, tax records, insurance policies)

Related Post: Guide to Estate Planning in 6 Steps

Creating A Plan for Digital Assets In 5 Steps

I will guide you through five steps (see below) so that your digital assets, those of value, monetary and sentimental, can be properly addressed for your loved ones.  How have we accumulated these various digital assets? The Internet of Things (IoT) has been extending our connectivity in our homes, at work, and socially. The line between work and home has increasingly blurred, resulting from technology and the effects of the pandemic. We are nearly all online using broadband, mobile and social media.

Take A Look At How We Use Technology:

 

    • 90% of US households have high-speed broadband connections (NCTA)

 

  • 97% have a cellphone, with 85% owning a smartphone (Pew Research); and

 

 

  • 70% are engaged in social media and social networking (Pew Research).

 

 

 

 

  • The typical person has over 100 digital accounts, ranging from email to social media, maintaining 100 passwords. Most (86%) of people commit their online passwords to memory. NordPass, multiple sources)

 

 

 

We devour digital technology, which creates our digital assets. These assets are part of our net worth. The average person in the US has over $55,000 in digital assets, but that is likely an understated number.

Cryptocurrencies Pose Unique Challenges

As much as 14% of Americans own cryptocurrencies, people have grown more comfortable with these assets. Cryptocurrency ownership poses unique challenges for your heirs who may not want these risky assets. Even so, cryptocurrencies are extremely difficult to access. Industry experts say millions of bitcoins (billions in value) have been lost.

By their virtual nature, cryptocurrencies are extremely secure, held in digital wallets by their owners. To access these assets, you need to know a private password and an especially encrypted private key known only to its account holder.

There is no central authority that tracks these keys as of yet, so without heirs having knowledge of how to access your crypto ownership when you are gone, significant value can be lost forever. Your loved ones may in luck if you hold your cryptocurrencies in a Coinbase account as they will help your family after you pass.

We May Not Be Fully Accounting For These Assets In Our Estate Planning

Digital assets refer to different forms of content stored in a digital format. A digital estate consists of digital media rights that may pass onto our heirs. If we fail to plan, we may frustrate our family’s ability to recover important photos, videos or pay our bills after we pass away.

In the past when you died, an executor of your estate, or a personal representative (if there wasn’t a will), would be responsible for the distribution of assets to loved ones.

They would sift through your paper records and physical mail recently received by the deceased to find bank accounts, insurance policies, or bills to determine monetary value.

Family members would also go through their assets at home or wherever to find their physical objects like photos, phone books with their contacts, videos, letters, all in the search for items of sentimental value.

However, a lot of that stuff is likely in a digital form now. There may be years worth of data, and it may be more challenging to find.

Finding Our Legacy Assets

In the days before the Internet, the family and the executor of the estate would likely have been granted access to the mail and the deceased person’s home. However, the amount of information we now generate online, stored in cyberspace indefinitely, has created significant privacy concerns.

If the executor or family  can’t quickly identify digital monetary and securities account ownership, those assets may end up in the state treasuries as “unclaimed funds.” Not only can these valuable assets remain hidden, but personal debts for the estate may also rise as bills go unpaid. Dormant bank accounts are particularly vulnerable to identity theft.

Ajemian v Yahoo! A Major Court Battle

Tech companies erected gateways to stall or prevent access to online accounts by loved ones and their legal representatives.  Access to online accounts has become more restrictive due to legislation, leading to a lot of lawsuits. One prominent court case, Ajemian v Yahoo!, reveals the difficulties families face when requesting access to emails.

John Ajemian had tragically died in 2006. He left a Yahoo! email account but no will or instructions for his account. Using privacy concerns, Yahoo refused the family access to their brother’s email. His siblings wanted to find information to invite friends to their brother’s memorial. Later, they sought access as a means to finding their brother’s assets.

The Supreme Judicial Court of Massachusetts decided on a lengthy court battle in 2018. It held that personal representatives might provide lawful consent on a decedent’s behalf even without the express authorization in the decedent’s will.

As a result of this case, tech companies like Facebook are getting better at dealing with digital assets on death. They are providing ways for account holders to create and provide access to legacy accounts after they die. Loved ones would be able to look after the  “memorialized” account or have it deleted from Facebook. Some believe that Facebook may have more “dead people” accounts by the year 2050 than the living accounts. Apple recently announced a new digital legacy service to pass on information stored by them though details are not yet out.

We Spend Our Lives Online, But We Don’t Always Own It

Each online service provider has its respective terms of service (TOS), making it very difficult for families to easily find access to those accounts, which may contain personal content dear to them. The Ajemian decision may promote legal change for streamlining the process. You should review and understand these terms when you sign for new accounts.

Still, you should have a plan so your loved ones can secure your digital property after you die. Sometimes you think you own a digital asset, but you purchased a nontransferable license to use the asset.

Your Estate Plan For Digital Assets

 

Step 1: Create A Digital Asset Inventory

Make a list of all of your digital assets, those with monetary and sentimental values. They should be categorized and referenced in a document. If you want to provide passwords associated with the accounts, you may want to store the list in a safe deposit box or use a digital asset manager. There are inexpensive password management apps such as 1Password or NordPass you can use. Make sure your digital asset list is in a secure place.

Besides passwords, there may be data encryption or another protective layer protecting access. This list would need to be updated periodically for new and closed accounts.

You can customize your list in the following categories:

Devices. Computer hardware, such as computers, external hard drives, flash drives, tablets, smartphones, digital music players, e-readers, home security systems, medical devices, smart television, digital cameras, and other digital devices like Nest and Alexa;

Online storage at home and work. Any information or data stored electronically, whether stored online, in the cloud, or on a physical device. Examples would include your Dropbox accounts;

Any online accounts. Email and communication accounts (e.g., iPhone, Skype, and Facetime), online banking, insurance, and other financial sites (e.g., PayPal, Square), cryptocurrency accounts, seller’s accounts (e.g., Etsy), social media accounts, shopping accounts, photo and video sharing, video streaming accounts (e.g., Netflix, YouTube), video gaming, online betting, and esports;

Points, Coupons, and Loyalty Rewards programs. Shopping, travel, hotel, airline, grocery, and shopping accounts are exceptionally loyal and have a monetary value on apps or cards.

Websites and blog accounts that you manage for personal and business;

Licenses domain names that exist and are owned by you and by your own business;  and

Intellectual Property, including copyrighted materials, trademarks, patents, and any code you may have written.

Cryptocurrencies include better-known Bitcoin and Ethereum, but there are thousands of different types; and NFTs. These assets should be on your digital asset list to give notice to your heirs. Separately, you can make reference to the essential passwords or private keys which should be in a secure place.

Step 2:  Decide How To handle These Accounts

You may want to divide the list into monetary and non-monetary accounts. The latter may be more personal or sentimental. You may wish to provide specific instructions on whether you have a legacy account for your social media accounts. 

Monetary Value

Digital assets with monetary value can pass through your will or a trust (more on that later). For example, websites, blogs, and domain names may have significant value as standalone businesses or, in combination and estate documents should reflect them.

Domain names can be sold for prices in the six digits, while the most expensive names have commanded millions.

Step 3: Estate Planning Documents: Powers of Attorney, Wills, and Trust

There should be a legally binding document that reflects your plans for digital assets. It could be a will, codicil (an attachment to your will), or refer to a letter of instructions mentioned in your will. Your will should not contain any passwords. You may want to consider a trust instead.

You should consult with an attorney who could help you decide what document is best and what sample language to use in your powers of attorney, wills, or trust.

Step 4: Powers of Attorney (POA)

Each state has its own Statutory Short Form of Power of Attorney, where your attorney can include language to limit or supplement authority granted to the agent you have chosen.

You can ask your attorney to spell out the agent’s power. The agent can have powers that allow them to do certain things such as use, manage, terminate, transfer or have full access to digital accounts, and name the type of accounts.

The specific accounts may be email accounts, digital music, video, photos, software licenses, e-commerce accounts, and bank/financial accounts.

Does the agent have access, including passwords and access controls?

Your attorney can inform the designated agent whether they will handle the digital property or if there is a specific digital agent with respective powers for those assets.

Step 5: Distribution of Digital Property: Wills or Trusts

Traditionally, some assets go through your will to your heirs.  Distribution of other property may be by operation of law or designated beneficiary. A life insurance policy is such an example.

Distribution of Valuable Digital Assets May Be through Wills or Trusts

Just think about how you access your accounts now. The nature of accessing online accounts requires knowledge of your usernames, security questions, passwords,  and possibly additional encryption layers. That is challenging for those not familiar intimately with your accounts or digital assets.  That information should not be in a will, mainly because it will become part of the public record if it has to go through probate.

Trusts May Be Better Than Wills For Digital Assets

Trusts are more desirable for digital ownership and account information because a trust does not become part of the public record like wills.

You may grant authority to a trustee as to how to handle this property. If the digital property in question is of significant value, you can create a Digital Asset Trust. Alternatively, your attorney can create a testamentary trust pertaining only to the digital assets that can be folded into a will.

If You Want Digital Assets In Your Will

You can guide your attorney by providing your digital inventory list and distribution of digital assets. When you die, the executor of your estate has the responsibility of distributing all of your assets to your intended recipients.

You can pass some of your digital assets through your will, but many of these assets cannot be passed through a will. 

Examples of Distribution of Digital Property 

  • Funds that are in your bank, investments, PayPal accounts.
  • Travel reward points and frequent flyer miles.
  • Stored photos or videos on your hard drive.
  •  Business websites, blogs, products that you sell in an online store.

If you don’t own the property or have sentimental rather than financial value, it isn’t likely to qualify as a testamentary asset distributed through your will.

Examples of what may not get quickly passed onto heirs (although changes are emerging) 

  • Email, apps, and social media accounts generally have terms of service agreements that often ask you to agree that your account is “non-transferable.”  In recent years, the tendency has been to give heirs the ability to terminate these accounts upon showing a death certificate.
  • Downloaded music from iTunes usually comes with a limited set of rights, and you don’t own digital music.
  • Licensing agreements, such as domain names that you don’t own.
  • Streaming subscriptions like Netflix are services to download movies you don’t own.

Consider Naming A Digital Executor

Your attorney can add language to enable the executor (or digital executor) to have authority to manage, handle, access, use, distribute, control, and dispose of digital property, including and not limited to all named digital assets. You can assign a separate executor in the will to have authority for all digital assets.

What the digital executor does:

  • Transfers money, points, and credits from online accounts to your heirs.
  • Closes social media accounts unless you left instructions for a memorial site.
  • Archives owned electronic files that contain owned photos and videos.
  • Cancels subscriptions to online services.
  • Transfers or closes blogs, websites, or any online businesses.

Letter of Instructions

The will should never contain passwords or sensitive information because of the risk that the will may become part of the public record if the will goes to probate. Instead, you should have your attorney consider referencing in your will an external list of digital properties with relevant usernames, access codes, security questions, and passwords maintained in a separate document.

A letter of instructions is the best way to contain sensitive, detailed information about accessing your digital property. These letters have been used with traditional wills for a long time. This letter can be referred to in the will but is a separate document.

Have A Safe Place To Keep Sensitive Information

You should store information like accounts and access data in a separate location from your will. Given its sensitivity, you probably want to put your document into a safe deposit box or another secure place.

Review Your Digital Inventory List Periodically

We are often opening, closing, or changing our online accounts, along with their access information.

Monitor Income-Generating Accounts

Keep track of essential accounts, particularly income-generating accounts such as fledging small businesses, with customer lists and their websites. That is where most of the digital assets’ monetary value resides. If you are changing your passwords frequently, you will need to record that information.

Keep Track Of Your Assets

Review your estate planning documents periodically every few years and when there are life-changing events. If these documents have been completed but are largely silent concerning digital assets, you should update your plans to include them.

Final Thoughts

I have been writing about digital assets for years as mass changes occur. Our digital lives are changing so rapidly with technological advances that it is not easy to predict what we may store online in the future. Many of the laws predate the explosion of the Internet. They have not kept pace with these rapid developments balanced with our need for privacy.

Therefore, we need to be proactive about staying on top of what we own digitally. Digitization helps us in so many ways, but it is messy for those we leave behind.

Do you have an estate plan that addresses your digital property? Do you keep track of your property with an inventory list?

Thank you for reading! We hope this guide helps you in your estate planning. Please visit us at The Cents of Money. We would love to hear from you about different ways to keep track of your online accounts to save time and effort.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DRIP Stock Investing: How to Collect More Stock on Autopilot

DRIP Stock Investing: How to Collect More Stock on Autopilot

Do you want to reinvest your dividends without having to think about it? Then, DRIP investing may be the tool you need. Learn everything on how to reinvest your dividends automatically with a DRIP plan.

DRIP is an acronym for Dividend Reinvestment Plan. It is an arrangement where dividends are automatically reinvested into more shares. Thus, a DRIP plan makes it easier and, at times, cheaper to reinvest dividends.

Before you join a DRIP plan, it’s good to understand how it works, its benefits and drawbacks, and how you can join.

What is DRIP Stock Investing?

When you buy dividend stocks, companies pay you periodically for holding their shares. A dividend is a way for the company to say thank you for investing in us, and dividends mostly come from the company’s profits in the previous year.

In a DRIP plan, instead of receiving that small dividend check at the end of every financial period, the company reinvests the dividend payout and buys more shares in a DRIP plan.

A DRIP plan can help maximize the value of your stock as you take advantage of the compounding returns, possible discounts, and dollar-cost averaging. But to benefit, you will need to enroll in a DRIP plan.

How Does DRIP Stock Investing Work?

A dividend is a return to shareholders on their investment. It’s usually in the form of cash payment that can be paid through check or deposited directly to the shareholder’s account.

A DRIP plan offers investors an opportunity to reinvest their cash dividend and purchase the company shares. However, they will need to buy the shares directly from the company. Since the shares come from the company’s reserve, these aren’t offered through the stock exchange.

For instance, you have 1000 shares in a company that pays $1 per share in dividends. Therefore, if you enroll in a DRIP program, you will get $1000 in dividends. However, if we assume that the company’s stock is trading at $50 when receiving the dividend, you will be allocated an additional 20 shares instead of a dividend check.

Fractional Shares

Dividend dripping isn’t limited to a whole share, and this is why these plans are unique. The companies keep good records of the percentage of share ownership. Like the words suggest, fractional shares are a fraction of a whole stock. That means you can own 1.75 of a share instead of two shares.

Now let’s assume the company shares in our example above were selling at $45 instead. That means your dividend payouts of $1000 will acquire 22.22 shares in a DRIP plan. However, not all brokerage platforms have fractional shares. So if there is money left over after buying full shares, this is usually credited into the investor’s account.

Pros of DRIP Stock Investing

Here are the benefits of dividend reinvestment plans.

  • Dollar-cost averaging. When you reinvest your dividends, what you are essentially doing is dollar-cost averaging. Dollar-cost averaging is a recurring purchase of an investment instead of investing once in a lump sum. When you buy extra stocks regularly, you can spread out your purchases and have an average purchase price regardless of the state of the market.
  • Immediate reinvestment. Since dividends get automatically reinvested into buying more shares, DRIP can minimize the chances of leaving your cash lying idle as you don’t have to do it manually. On the other hand, if you keep forgetting to reinvest your cash, your investment can miss out on return over time.
  • Lower commissions. If you join a DRIP program through a brokerage firm, the brokerage firm may not charge a commission on the reinvested dividends. However, this varies per broker.

Cons of DRIP Stock Investing

Here are the drawbacks of DRIP investing:

  • Taxation. Dividends are considered taxable income. Even if you reinvest your dividends before they hit your bank account, they will still be reported to the IRS as income. When you enroll in a DRIP program, you should remember that you may need to pay up to 20% in taxes of the dividends reinvested. You will need to have that amount in cash. Otherwise, you may have to sell some of your shares to get the cash.
  • Non-diversification. After setting up a DRIP plan for a single stock, you may end up accumulating a considerable amount of that stock over time. As a result, it prevents you from diversifying and can put you at bigger risk. Therefore, you may need to keep checking your portfolio and rebalancing when necessary.

How to Start DRIP Stock Investing?

If you would like to benefit from DRIP investing, you need to have at least one share in company stock in your name. You can then get in touch with a broker to find out if they have a DRIP investment program. A transfer agent usually handles the DRIP account, but they can also direct you to the right agent.

Some brokerage firms also allow shareholders to reinvest their dividends free of charge through their plans. If you have already bought shares through a brokerage, you may want to consider this option. When you login into your online account, choose the option of reinvesting the dividends. If you have an adviser, you can call them to take you through the process.

Some brokerages, like M1 Finance, don’t offer a traditional DRIP. However, they do offer reinvestment of your received dividend across your entire portfolio, which will also contribute to the compounding effect of your portfolio over time.

Company-Operated DRIPs

Some of the companies that have significant market capitalization operate DRIPs. Examples are Johnson & Johnson and Coca-Cola, which manage their direct stock purchase plans, allowing investors to buy shares directly from them instead of through a stockbroker. They also have DRIP plans allowing investors to reinvest the dividends they earn on the shares.

Brokerage DRIPs

There are many brokerage companies out there that facilitate DRIP investing, like Vanguard or TD-Ameritrade. All you need to do is select your dividend stocks and opt-in to the brokerage of your DRIP. You will then get a payout in the brokerage account, as the form automatically reinvests in the new shares.

The use of DRIP plans with a broker is usually the easiest way of reinvesting dividends. One advantage of using brokerages is that they can offer you an opportunity to invest in DRIPs in more than one company, which can help diversify.

Third-party DRIPs

The majority of companies that pay dividends outsource the DRIPs and direct stock purchase plans to third parties, also known as transfer agents. A popular transfer agent is Computershare. You can visit their search portal to sign up for DRIPs. Remember that you may be charged a fee for the third party and company-operated DRIPs.

DIY DRIPS

If the company you would like to invest in doesn’t have a DRIP plan, brokerage, or third parties to facilitate the reinvestment, you can reinvest the dividend yourself. All you need to do is buy shares or fractional shares reflecting the dollar value of the dividends paid to you. While it isn’t as easy, it can be an option.

If fractional shares aren’t available, you can hold on to the money until you have enough to purchase a whole share.

One downside of this method is that it’s taking up more time than a traditional DRIP would. However, it can still work, and you will benefit from the compound returns as well as the dollar-cost averaging.

Want to learn more cool facts about investing? Check out What Time Do The Stock Markets Open for Trading.

Best DRIP Stocks With No-Fee DRIPs

There are several places where you will find DRIP stocks to add to your portfolio. First, you may want to check out the dividend-aristocrats, companies with a history of increasing their dividends every year for at least 25 years.

Combining DRIPS and dividend aristocrats can be powerful. Focus on companies that have increased their dividends over the last 25 years. Those will probably be an excellent addition to your dividend portfolio, which will translate into more shares for you every year.

Here are the ten leading dividend aristocrats with no-fee DRIPs:

  • AbbVie Inc.
  • Johnson & Johnson
  • Exxon Mobil
  • S & P Global Inc.
  • 3M Company
  • Realty Income
  • Aflac Incorporated
  • Federal Realty Investment Trust
  • Chubb Limited
  • Hormel Foods

Some companies also have a stock-buying program for their staff. Instead of paying dividends through checks, they offer their employees an opportunity to reinvest the money back into the company’s stocks. This program has become so popular that it has been extended to stockholders. Such companies include:

  • 3M
  • PepsiCo Inc
  • Exxon Mobil

Therefore, these companies are an excellent choice for DRIP programs. When researching companies, check out their histories in dividends to determine how consistently they have been paying even if they haven’t increased their dividends every year.

Final Thoughts – DRIP Stock Investing

If you are looking to grow your portfolio faster through compounding returns, DRIP investing is an excellent option to invest wisely. DRIP investing means you reinvest the dividends companies paid you to own more shares. The following year, you will increase your dividend payout and hold even more company shares.

The compounding will start slowly, and over time you’ll find you will own more and more shares. Then, when you count the stock price increase as well, your return on investment will increase.

To learn more about DRIP investing, you should consider talking to an investment or financial adviser about your goals and situation. They can help you create a portfolio plan that will work for you and your investment goal.

Thank you for reading. Please visit us at The Cents of Money for more articles of interest. Please consider subscribing to our growing community!