Winter 2007 USAA.com Magazine

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winter 2007 12 usaa.com A Rookie’s Guide to Investing By Jeff Wuorio At one time, every investor was a newbie. If that’s you, we’ve got you covered. Use this simple guide to get ready, get set, and get going. Ready set There are three basic investment accounts, but many different types of investments. Find which ones work best for you. Investment Accounts ➊employer-sponsored retirement plans These allow you to save and invest without much effort. They’re funded by deducting a certain amount of money from your paycheck before taxes are calculated. The investment grows tax-deferred, which means you don’t pay taxes on the funds until you withdraw them. The 401(k), 403(b), 457, and Thrift Savings Plan (for federal employees and the military) are all examples of this type of plan. TIP: Some companies offer a dollarfor-dollar match up to a certain percentage. Never leave that “free money” on the table. ➋individual retirement accounts There are two types: traditional and Roth. A traditional IRA may offer certain investors annual tax breaks for contributions. A Roth IRA offers no upfront tax break for money you put in but lets you withdraw the money tax-free after you retire, if you held the account for at least five years and are 59½ or older. Both accounts grow tax-deferred until you take out the money. TIP: Generally, you must leave your money in these accounts until age 59½ to avoid penalty fees. Additional limitations will apply. Before you invest, educate yourself, and take an honest look at your finances. You can’t invest if you haven’t taken care of these essentials. • create your cushion Keep three to six months’ living expenses in a money market or savings account for emergencies. • pay down debt Pay more on credit cards than the monthly amount due, and tackle ones with the highest interest rates first. • take free money Invest enough in your employer’s retirement plan to get any matching dollars offered. • max it out Put the most amount allowed by law into any Individual Retirement Accounts you own. • know your spending habits Track your spending and cut out the extras so you can free up cash for financial goals. • read up Don’t invest in anything without some education. Pick up a book or magazine about money or read a prospectus to learn as much as you can about money and investing. • know your goals Need $30,000 for a down payment on a house in three years Certificates of deposit (CDs) and money market funds may be best because they tend to have lower risk than other types of investments. Of course, an investment in a mutual fund, unlike a CD, is not insured and may lose money. Want to retire by age 60 That would likely call for something more aggressive, such as stock or bond mutual funds. These typically have higher returns but incur greater risk. A l l i m a g e s : g e t t y i m a g e s
Invested Interest Here’s what you’ll earn in 30 years by investing $50, $100, and $150 per month at 7 percent interest. Go When you’re ready to take action, follow these steps: What’s a mutual fund A mutual fund is not a specific investment. Think of it as a company that pools investors’ money and puts it into stocks, bonds, or other types of investments. ❸non-retirement accounts These are simply brokerage, bank, or mutual fund accounts held in your own name. They receive no special tax treatment and provide no tax breaks but are always available. TIP: This could be used for a down payment on a house or potentially to build up a pool of funds. Investment Types • money market fund A type of mutual fund required by law to invest in low-risk, short-term debt instruments. A money market fund is considered one of the safest mutual funds and pays dividends that generally reflect short-term interest rates. TIP: Many currently pay yields around 5 percent. • certificates of deposit Federally insured deposits issued by banks and savings and loan institutions that pay a specified amount of interest. TIP: Many five-year CDs currently pay around 5 percent interest. • bonds A type of debt. When you buy a bond, you’re lending money to a government, city, town, or corporation. In return, you receive specified interest payments and the value of the bond, known as the principal, when it matures or comes due. TIP: Bond prices typically rise when interest rates fall, and vice versa. • stocks A share of ownership in a company. Companies raise funds by selling shares of stock. How well the stock does depends on how well the company performs, overall market conditions, and other factors. TIP: Newcomers should avoid buying individual stocks. Picking a winning stock is a dicey business even for experienced investors. 30 Years $60,998 20 Years $26,046 10 Years $8,654 $121,997 $52,093 $17,308 $182, 996 $78, 139 $25,963 • Treat investing as a bill Set up a system so that money is automatically moved from a checking or savings account into the investment of your choice. Even $50 a month can make a big difference in years to come. Of course, systematic investing plans do not assure a profit or protect against loss in a declining market. • Know how everything fits together The less time you have to invest, the less risk you can afford. If your goal is less than three years away, a certificate of deposit or money market fund at your bank may be the safest bet. For longer-range goals, such as retirement or saving for a child’s college education, go with stock mutual funds. Visit Web sites such as morningstar.com to research mutual funds. • Look to the pros A Certified Financial Planner practitioner can help you build the right investment plan. Ask friends for referrals or consult professional organizations such as the Financial Planning Association at fpanet.org. winter 2007 13 usaa.com usaa.com Scared to invest Log on to usaa.com/magazines and read “5 secrets to tackle your fear of investing.” $ 50 $ 100 $ 150 This chart is hypothetical and does not represent any USAA product.
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Winter 2007 USAA.com Magazine

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