August 1, 2008

Part 5: Establishing an Investment Plan

[Part 5 of 12 in a series on How to Turn Your Financial Goals into Reality.]

Time is the great financial equalizer. Given time to implement and contribute to an investment plan, even a person with a modest income can accumulate substantial financial assets. This is good news for workers in their twenties or early thirties who have kept their spending under control and have excess income to regularly invest.

Wealth is not established through a series of random events, but rather by implementing a disciplined sequence of repeatable achievements. Regularly contributing a set portion of your income into an investment account is a rock-solid strategy for realizing your future financial goals.

POWERFUL INVESTMENT PLANS THAT DO NOT REQUIRE A FORTUNE TO START

Employee Savings Account (401-k, 403-b, SEP IRA)
These are the most popular investment accounts for long-term savings and retirement. Many employees and business owners have access to these types of investment plans.

Advantages:
1.) Don’t need a specific amount to start—deducted directly from paycheck (“Pay yourself first” principle).

2.) Money goes into the account “pre-tax”, meaning every dollar you invest only reduces your take-home pay by roughly 65 cents, depending on your tax bracket. In addition, growth of the assets is tax-deferred.

3.) Many employers provide some amount of matching funds to your contributions

Disadvantages: (Everything has some downside to it)
1.) Limited investment choices.

2.) Annual contribution limits apply, but most can invest at least 15% of their income.

3.) Heavy taxes and penalties on early withdrawal—truly designed for retirement.

Roth IRA
This is also a tax-deferred account with some special features that can allow the assets to be accumulated for retirement or for other long-term goals, such as college tuition for a child or starting a business.

Advantages:
1.) Can be started with as little as $250.

2.) Many investment options, especially if account is held by discount broker custodian.

3.) Contributions can be taken out anytime for any use—very versatile.

Disadvantages:
1.) Annual contribution limits apply—$5,000 in 2008 ($6,000 if over 50 years of age).

2.) High wage earners cannot contribute.

3.) Taking out earnings before the age of 59½ may invoke penalties and taxes.

IN SUMMARY

I have briefly described two of the most popular investments plans for successful long-term growth of your savings. For advice on selecting specific investments within these accounts, you may need to consult a financial professional. Many employers provide assistance in this area through the custodians of their employee savings plans.

The most important key to financial success is getting started early. Failure to take advantage of the long-term benefits of these plans can result in a lost opportunity in the decades ahead.

Dale A. True, Registered Investment Adviser
True Financial Strategies, LLC
August 2008

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