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Seven Tips for First-Time Investors

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Making financial decisions can be confusing and overwhelming, to the point that you do nothing to prepare for your financial future. But this Financial Literacy Month, we’re helping you understand finance basics so you can make money decisions with confidence.

Step one was understanding your credit.

Step two was planning and preparing for retirement.

Step three was managing money wisely during life’s big moments.

Step four is learning investment basics before you dive in so you can avoid scams and protect your money.

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Thanks for following along all month as we shared money tips for you. If you missed any of our tips, you can follow us on Twitter, Facebook, Google+  or our blog using the hashtag #mymoney to see all the advice.

Pay Down Debt or Invest My Money?

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By Kathy Sweedler, University of Illinois Extension Educator and blogger for Plan Well, Retire Well: Saving and investing your money

As the economy recovers, the trending question has been, “Is it better to pay down debt or build up savings and investment?”  Depending on your situation the question may sound a little different such as:

  • Pay extra on my student loan or invest in a Roth IRA?

  • Build up an emergency savings fund or pay off my credit card debt?

  • Pay off my mortgage or put more money in my 401(k) retirement plan?

but the intent is the same. Whichever question pertains to you, I suggest you ask, “How can I get the most out of my dollars and what’s important to me?”

We tend to be on the lookout for the “best buy” for our dollar. We know that if we spend our dollars on an item such as a movie ticket that the dollar will not be available to do something else (like buy dessert). The opportunity cost of the movie ticket is the loss of buying dessert. In this example, a dollar is worth a dollar because the choice is, “do I go to the movies tonight or buy dessert tonight?” Both options take place now.

For long-term decisions we need to consider how the dollar we have now may change in value over time. For example, dollars used to buy mutual fund shares today may increase in value over time.  If you use $100 today to buy mutual fund shares and the mutual fund earns a 10% annual return, at the end of the year you would have $110. This is a $10 gain.

But if you use your $100 to buy mutual fund shares, then you cannot use these dollars to pay down credit card debt. If you have a $100 credit card balance with an annual percentage rate (APR) of 23%, and the balance is not paid, at the end of the year you would owe $123. (I’m assuming no minimum payment required or fees to keep this example simple.) However, if you used your $100 to pay off the credit card balance, you would save $23 in interest cost. You have essentially earned a return on your money (gain) of $23 dollars.

When considering an investment with a return of 10% or paying off a debt with an APR of 23%, you get more from your dollar by paying down the debt. Look at the interest rates charged compared to the possible return on investing when deciding how to get the most from your dollar.

For some questions, the tax code makes this comparison more complicated. For example, you may be able to reduce your income tax liability if you itemize deductions and include mortgage interest costs. You may also have a tax-advantage if you invest money through an employer-sponsored retirement plan such as a 401(k). Keep in mind your tax situation when thinking about the opportunity costs of your dollar.

You also need to ask, “What’s important to me?” Financial decision-making is more than adding up numbers. Our personal finances are influenced by our values. Some people feel strongly that they do not want to carry debt. Others value having emergency savings. A saving fund can provide financial security, and help avoid taking on new debt when unexpected expenses come up. That’s what makes the question of “what to do with my money?” both interesting and difficult.

Both the opportunity cost of your dollar and your values are important when deciding whether to pay down debt or invest for the future. Visit the Plan Well, Retire Well blog to join in more University of Illinois Extension’s discussions about how to manage money.

What You Should Know About Investing

Whether you’re interested in investing for the first time or whether you’ve been investing for years, the U.S. Securities and Exchange Commission (SEC) has advice on how you can get the most from your investments.

Checking the background of an investment professional is easy and free.

Details on an investment professional’s background and qualifications are available through the Investment Adviser Public Disclosure website and FINRA BrokerCheck. If you have any questions on checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.

Diversification can help reduce the overall risk of an investment portfolio.

By picking the right mix of investments, you may be able to limit your losses and reduce the fluctuations of your investment returns without sacrificing too much in potential gains. Some investors find that it is easier to achieve diversification through ownership of mutual funds or exchange-traded funds rather than through ownership of individual stocks or bonds.

Promises of high returns, with little or no associated risk, are classic warning signs for fraud.

Every investment carries some degree of risk and the potential for greater returns comes with greater risk. Ignore so-called “can’t miss” investment opportunities or those promising “guaranteed returns” or, better yet, report them to the SEC.

Some investments provide tax advantages.

For example, employer-sponsored retirement plans and individual retirement accounts generally provide tax advantages for retirement savings, and 529 college savings plans also offer tax benefits. Individuals who are interested in learning about the tax impact of their investment decisions should consult their tax adviser or visit the IRS website.

Active trading and some other very common investing behaviors actually undermine investment performance.

According to researchers, other common investing mistakes include focusing on past performance, favoring investments from your own country, region, state or company, and holding on to losing investments too long and selling winning investments too soon.

Find more tips and advice for keeping your money safe and growing your investments from the SEC’s 13 Things Everyone Should Know About Investing.