Hey There, I’m Melanie! I am a former CPA turned personal finance blogger and mom of three. When you ‘Budget With Mel’, you’ll develop monthly budgets, cost-cutting tactics, and learn new behaviors and beliefs about money. It’s time you took the stress and confusion out of your personal finances.
Hey There, I’m Melanie! I am a former CPA turned personal finance blogger and mom of three. When you ‘Budget With Mel’, you’ll develop monthly budgets, cost-cutting tactics, and learn new behaviors and beliefs about money. It’s time you took the stress and confusion out of your personal finances.
Investing jargon can be downright confusing, so I'd like to share the differences in mutual funds vs stocks investing portfolios. This is important to understand because how you invest will have a direct effect on how much money you have in retirement.
When talking about investing, most people don't think retiring a millionaire is within reach.
What do think it takes to retire a millionaire?
Taking lots of risks, which you can’t afford to do? Having a lot of luck, which you never seem to have?
The truth is, most of the time, everyday millionaires are not extraordinary people who got rich quick or on a whim.
It’s not because they had a supernatural vision that prompted them to invest in Starbucks when it first began, and they went from eating Ramen to prime rib on the beach in Dubai.
Rather, it’s because they were frugal, disciplined, and patiently invested over time.
Furthermore, most millionaires know what they’re investing in. They take time to educate themselves about the economy, stock market, and general money principles.
Isn’t it interesting that many Americans work so hard to earn money and are so consumed with their career, but they can’t take the time to manage it well?
Investing isn’t rocket science. However, that being said, it can be confusing because there are many different ways to invest and opinions on how you should invest.
Let me break it down for you!
You should begin investing after you’ve paid off all your non-mortgage debt, and have 3-6 months of expenses saved in your emergency fund. Then, and only then, are you ready to invest money for retirement.
If you decide to invest while you’re in debt and don’t have much in savings, you will be financially insecure
and ineffective
because you are trying to focus on too many different things at once.
Research shows when you focus on one goal at a time, you are more effective!
A good rule of thumb is to invest at least 15% of your gross (pre-tax) income.
First, if your employer offers a retirement plan, invest in that plan up to the employer match. An employer sponsored retirement plan is also referred to as a 401(k), or 403(b) if your employer is a tax-exempt organization.
Next, invest outside your employer sponsored plan into an IRA (individual retirement account), preferably a Roth IRA. Anyone can open an IRA, however whether you open a Traditional or Roth IRA will depend on your income.
I recommend only investing up to the employer match in a 401(k) plan is because typically, you are limited in your investment options. On the other hand, when you open an IRA, your investing options are endless. An investment professional can help you choose investments for your IRA portfolio.
If you feel that your employer plan has some great options, feel free to invest the full 15% in that plan!
The key point is to make sure that you are investing at least 15% of your gross income.
Diversification is the key to long-term i nvestment success. In other words, spreading your money across multiple investments to mitigate the risk of having all your eggs in one basket.
Let's take a look at the key differences when choosing between mutual funds vs stocks.
Investing in single stocks means you buy a single share (stock) of a company in hopes of making a short-term profit. The goal of stock trading is to buy the shares of the company at a low price, and then sell at a high price. Additionally, when you buy single stocks you avoid high, recurring fees. Essentially, you are your own portfolio manager. You pay a fee to buy the stock, and you pay a fee when you sell it. You’re not paying someone to actively manage your investment portfolio.
Yes, there are stories of people who bought stock in Facebook and Netflix when they started up and are now millionaires.
However, for every success story stock trading, there are a dozen stories of failures.
The problem with stock trading is you chase short-term profit and bear incredible risk. You might make it big with a few different stocks, and then lose your tail on a few other ones.
It’s a poor strategy for long-term wealth building.
On the other hand, when you buy mutual funds , you purchase a fund that consists of groups of stocks- potentially hundreds. This diversifies your risk.
Christ Hogan puts it this way - Investors have a long-term perspective while traders have a short-term perspective.
The types of mutual funds that you invest in should be determined based on your age and risk appetite.
There are four primary mutual fund categories that Dave Ramsey recommends spreading your investments out across, including:
Choose mutual funds that historically deliver consistent results over a 10 or 20 year period.
Bonds are a type of fixed investment, and are considered a safe, low-risk investment. The three main types of bonds are corporate, municipal, and U.S. Treasury Bonds.
When you purchase a bond, you are the lender. Typically, you will receive a return on your investment in the form of dividends or interest.
However, that is not always the case. Because you are the lender, you bear interest rate risk, credit risk, risk of default, etc.
Bond buying and selling can get very complicated, so I’d highly recommend talking to an investment professional before you give it a go.
Similar to single stock trading, buying bonds is not a great strategy for long-term wealth building.
"If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
Warren Buffet
One of the big reasons the majority of Americans aren’t investing enough is because they feel like they don’t’ have enough money to invest.
As a result, they either don’t’ invest at all, or invest a small percentage of their income and simply hope for the best.
The truth is, if you want to consistently invest every month, you need to live on a household budget. Although living without a plan might work in the good times, it doesn't work in the bad times.
The key to a good financial plan is one that works in both good and bad times!
In summary, when it comes to mutual funds vs stocks, the key difference is the riskiness of the two types of investments.
Investing in single stocks is riskier, and while it may provide short-term profits, it is not a great long-term investment strategy.
In contrast, mutual funds diversify risk by grouping single stocks into funds. This is a better long-term investment strategy for those who are patient and willing to ride the highs and the lows of the market.
Remember, chasing short-term returns will only leave you with your pants down when the tide goes out!
Stay in the market for the long-haul and you can rest easy knowing that you're setting yourself up for success in retirement.
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