Generation Z — some of whom are in or approaching tween-hood — are rediscovering books that hooked millennials or even boomers.
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الاثنين، 6 أغسطس 2018
American Airlines’ Carry-On Fees for Basic Economy Will End on Sept. 5
This no-frills way of flying has become commonplace for budget travelers — and also a way for airlines to charge extra fees for seat assignments and additional baggage.
We have good news for our bargain-basement brood: Being basic is looking pretty fly right now.
American Airlines has announced that passengers on a basic economy ticket will be allowed a free carry-on bag as well as a personal item starting Sept. 5. Currently, it charges a $25 gate-check fee in addition to a $25 fee to check a first piece of luggage.
The airline made the change to keep it competitive with other airlines that include carry-on baggage in their economy fares, it said.
What You Get With American Airlines Basic Economy Ticket
While you might be stripped of the perks other main-cabin passengers enjoy, you can now pack a little extra on your next trip — if it’s after Sept. 5.
The carry-on bonus is good for all American Airlines destinations and it will allow passengers to use overhead bin space in addition to the under-the-seat space in front of them at no extra cost.
American Airlines basic economy ticket restrictions still apply.
Travelers will not be able to change, upgrade or board their flights early. However, they can choose their seats in advance or change seats for an extra $10 to $40 fee.
Thinking about snacks — I’m always thinking about snacks — don’t worry, all passengers receive the standard food and beverage service regardless if they’re on a regular main-cabin or basic-economy fare.
Read the Fine Print on Third-Party Purchases
Truth is, the quest for affordable flights often lands us on third-party travel-deal websites like Expedia, Kayak, Orbitz, Google and Priceline.
These aggregators list the cheapest flights first, which leads consumers into purchasing the lowest fare option without realizing they’re buying a basic economy ticket full of hidden restrictions.
Due to those hefty restrictions and fine print, there’s not much recourse if you accidentally buy a basic economy ticket.
Double check all the fine print and be sure you’re ready to commit to a basic economy ticket before making a purchase.
You might get stuck in a middle seat, but at least you’ll get there cheaply — and with an extra bag if you’re flying American.
Stephanie Bolling is a staff writer at The Penny Hoarder. She loves boarding a plane last. The less time spent crammed on a plane, the better.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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This Repayment Method Crushes Debt One High-Interest Account at a Time
The debt avalanche is another wintry metaphor to help you pay down debt. It’s more efficient and can save you money in the long run — but it might be harder work.
What Is the Debt Avalanche Method?
This method focuses on paying off your highest-interest debts first. Think: credit cards, probably. Maybe a loan you got back in the day when your credit wasn’t top-notch.
At the bottom of the list? Likely your federal student loans, which tend to come with favorable interest rates and flexible repayment options.
Also known as debt stacking, this method is great for people motivated by numbers — not so great for people motivated by feelings.
(Pst: If your Myers-Briggs test always produces an “F,” the debt snowball method might be better for you.)
Why Use the Debt Avalanche?
If you can’t tackle all your debts at once, paying off the highest-interest ones first is your smartest move. The longer they sit unpaid, the more debt you’ll accrue and the more this whole thing will cost you in the long run.
Let’s look at an example. (Warning: numbers ahead. But don’t worry; we’ll guide you through this.)
Say you have:
- A $5,000 loan at 3% interest, and
- A $5,000 credit card balance at 15% interest, and
- A budget of $300 a month to pay toward debt.
According to this credit card interest calculator, if you split it and pay $150 toward each debt:
- The loan will take 2.9 years to pay off and cost $227.23 in interest.
- The credit card will take 3.7 years to pay off and cost $1,508.52 in interest.
That’s not too bad. But what if you put extra funds toward the high-interest credit card debt, instead?
If you pay $100 toward the loan and $200 toward the credit card balance:
- You’ll pay off the credit card in 2.6 years and pay $1,032.66 in interest (saving nearly $500).
- You can then add the $200 you were paying toward the credit card to your loan payment. In eight more months, you’ll pay it off, and your total interest over 39 months would be $306.21.
Using the debt avalanche method to target your high-interest debt would help you be debt-free about five months earlier and save you $396.88 over paying toward each evenly.
Enough with the numbers. Who’s in the mood for a snowball fight?
Debt Avalanche vs. Debt Snowball
tl;dr: The debt avalanche method is usually the fastest and cheapest way to pay down your debt.
The debt snowball method, on the other hand, will cost you more in interest but could keep you motivated to stay on top of your finances. It involves paying your smallest balances off first — so, quicker wins as you knock those debts off your list.
As long as you’re paying off debt in the end, we support it.
If you need help deciding which method is best for you, Debt Payoff Planner app might help. It lets you experiment with “payoff order” — the debt avalanche or debt snowball method — to see how each would affect your debt balances.
For help fitting your debt repayment into your budget, Dave Ramsey’s EveryDollar app includes a “debt” category, where you can list and rank your debts and track your progress toward paying them off.
Debt Payoff Charts
So, playing with numbers every month might not be super fun for you. We get it. Maybe an art project could keep you motivated?
Use this fun trick to keep your debt-payoff goals top of mind and celebrate your progress paying it off: Create debt art.
You know those thermometers you see around town to measure an organization’s fundraiser? They help the organization track and celebrate its progress toward its goal.
Debt art is like that.
You can create artwork that measures your debt as you pay it off. It’s prettier than those giant thermometers, but still helps you focus on your goal.
It’s like adult coloring pages, but with a purpose.
You’ll start with an image, where each section is assigned a payment value. Color in a section as you make payments.
When the image is colored in, you’re debt-free!
Feel free to get creative and create your own — but, in case that’s not your thing, we created some debt art you can download and print for free.
Happy financial freedom!
Dana Sitar is a writer and editor at The Penny Hoarder. Say hi and tell her a good joke on Twitter @danasitar.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
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Auto Bits: Could compact pickup trucks have a future in America?
Tip of the WeekThere are no longer any compact pickups in the U.S. market. The new 2019 Ford Ranger and its peers are all larger mid-sized trucks. Could automakers be missing a golden opportunity?Americans like trucks. They buy them in great numbers for use in businesses and as personal and family vehicles. Toyota is one of the few manufacturers who has consistently offered a smaller than full-size truck over the past decades.However, even Toyota’s top-selling midsize truck, [...]
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Questions About 401(k) Matching, Book Recommendations, Educational Savings, Trade Schools, and More!
What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Saving to switch careers
2. New personal finance book recommendations
3. Match or no match?
4. Using Roth IRA for education
5. Less frequent 401(k) matching
6. Sensible gift for groomsmen
7. Giving up stuff you love
8. Trade school advice?
9. 7% average annual return?
10. Bouncing around streaming services
11. Take anything to Goodwill
12. Good audiobooks for road trip
When I was young, I used to always look forward to birthdays with great anticipation. A birthday usually meant presents and cake and ice cream and family and friends.
When birthdays pass for me as an adult, I would actually prefer that they were invisible. I don’t want to celebrate them because it’s honestly just another day in my life.
The difference is that, when I was young, there was a reason to want to grow older. It meant new opportunities and new experiences and new freedoms. Now? I have all of the opportunities and freedoms I want. There’s nothing really to be gained by the passage of years.
I’d far rather put a little extra effort into celebrating a child’s birthday (and by effort, I don’t mean throwing money at it, but actually putting footwork into doing something memorable for them) than celebrating my own in any way.
On with the questions.
Q1: Saving to switch careers
I am 31 years old, male, single, a lawyer who hates his career. I am in a huge law firm where I make good money but am basically anonymous and handle cases for clients that I hate and legally protecting them against people I have sympathy with. I wake up each morning dreading going to work. So I decided to switch careers. I am going back to school with the goal of teaching high school math.
Let’s assume that I could probably force myself to keep working here for another year before quitting. What’s the best strategy financially for transitioning back to school from this job? And eventually onward to teaching?
– Will
It’s good that you discovered that you hate your career when you’re still young and single, so that you’re not stuck in a situation where you can’t really change careers because of the responsibilities and other burdens on your shoulders.
If I were in your shoes, I’d obviously target going back to school starting in fall 2019. What do you need to do between now and then? You need to figure out what training you need to become a certified math teacher in the state you want to teach, figure out an educational path to get there in an efficient manner, and apply to the necessary schools.
From a more financial angle, you should aim to live as inexpensively as possible for the next twelve months. Going back to school is going to be expensive, so you’ll need all of the money you set aside, plus your life as a teacher is going to involve a lower salary than your life as a lawyer. Live cheap and build up a healthy amount of money in your savings account. However, if you have a 401(k), especially if it has an employer match, I would not cut back on your contributions. You’ll be extremely glad to have them in 30 years.
If you have any outstanding student loans, you should make sure that they will go into deferment while you go back to school. This will help you make ends meet while you’re studying. You’ll also want to make sure that you can take on the additional debt that will likely spring up from this trip back to school.
As for a school to target, aim for a state university in the state you currently reside. Figure out which one will require the minimum amount of coursework on top of what you’ve already taken to obtain a teaching certification in mathematics and aim for that.
In other words, start living cheap and start doing your homework. There’s really not much else to it.
Q2: New personal finance book recommendations
I’ve been enjoying the series on Wisdom of Frugality. You used to do a lot of book reviews. Do you still read personal finance books? Any newer ones that you recommend?
– Alexis
I do read recent personal finance books. A normal part of my writing routine is to go to the library, scavenge the personal finance book section (and a few other related areas), and do some reading with a notebook open in front of me, scrounging for fresh ideas or angles for me to consider for my own life and, eventually, for The Simple Dollar.
The thing with personal finance books is that most of them tend to go over the same core ideas. A personal finance book written in the 1970s and one written today is going to usually have the same core message: spend less than you earn and do something smart with the difference. Some specifics might change, but the core message is eternal. Thus, it can seem kind of repetitive to discuss the latest book that’s more or less the same as earlier books. In my eyes, Your Money or Your Life is still the best all-around personal finance book and The Total Money Makeover is still the best debt reduction book, and both regularly come out with revisions to make sure the little details are fresh.
I will make space on here to review truly interesting new personal finance books that I discover that say something that’s distinct and different enough from the usual message to be worth discussing. The Wisdom of Frugality is a good example of that.
Q3: Match or no match?
I know you always recommend beginning your retirement savings by investing in any company program up to the company match before starting to invest in a Roth IRA. However, what if you don’t know what the company will match? I’m about to begin a job with a new company and their 401(k) documentation specifically says “According to the [COMPANY] Savings Plan, [COMPANY] may, in its absolute discretion, make a matching contribution at Plan Year-End… Employees who are on the payroll on the last day of the fiscal year and who contributed to the savings plan during the year will receive a matching contribution if one is granted.” How would you go about investing here? Should I just pick a percentage and hope? Thanks in advance for your help!
– Tim
If I were in your situation, I would start out at work by asking your new coworkers whether or not the company typically does a match at the end of the year. Is this something they’ve actually done on a consistent basis? Or is it kind of an empty promise that they’ve rarely if ever fulfilled?
If it’s a pretty consistently fulfilled promise, then I would sign up for the 401(k). If there’s a good indication that they don’t actually do this at the end of the year with any consistency, then I would go with a Roth IRA.
Honestly, it sounds to me like it’s a company that’s hedging its bets. If they need to make their target numbers at the end of the year, this bonus is probably something that’s on the table as something they can cut. It does muddy the water for employees, though.
Q4: Using Roth IRA for education
My wife and I are expecting our first child in November. I am considering options for saving for his education. Is it better for us to start a 529 plan in my name and transfer it to him at birth or start a Roth IRA for me and use the contributions when he reaches college age and keep the gains for my own retirement? I’ve been reading about both options and want your take.
– Doug
My general belief is that parents should have their own retirement savings well in hand before they consider helping their children with college. If you don’t do that, then you run the risk of finding yourself at retirement age with inadequate savings and inadvertently becoming a burden to your children at the very point when they’re trying to find their way in the world. In other words, you should be putting away (at least) 10% for your own retirement before saving for your child at all.
Let’s assume, however, that you’re already doing that through your 401(k) and now you’re considering whether to contribute to your own Roth IRA or to your child’s 529.
Your choice boils down to this: would you rather have the proceeds of your savings be used to supplement your retirement savings or be used to supplement your child’s educational spending?
To put it another way, let’s imagine your future thirty years down the road or so. Are you better off with a little extra in your retirement funds while your child has a little bit higher student loan payments, or vice versa?
It’s really hard to predict which is financially “better” because we have no idea what’s going to happen in the thirty years in the middle. However, my feeling is this: I’d probably lean toward the Roth, all things considered, because it is inevitable that you will eventually retire, while it is not inevitable that your child will go to college or need your savings if he does go.
Q5: Less frequent 401(k) matching
What do you think about the trend of employers moving 401k matching to once or twice a year? This was totally new to me but recently I’ve heard of it more and more.
It seems like a crummy way to essentially replace a bonus with a previous benefit. It also incentivizes people to stick around longer—good for the employer, I acknowledge, but again gaming what had previously been a straightforward and socially valuable benefit. This coupled with “take a gamble” health care plans that atill manage to cost an arm and a leg…it seems like “benefits” of “good” jobs sure are eroding.
I am a firm believer in financial responsibility and frugality, but it seems consummately unfair in a world with such vast and growing wealth inequality that the burden of retirement and health care is continually shifted to individuals.
– Annie
This follows up nicely on Tim’s question above.
I think this trend of shifting to annual 401(k) matching is a trend that many companies are following because it keeps money in their own coffers for longer. If you pay all of the benefits at the last possible moment, then you keep the money that pays for those benefits in the company for longer, which is generally a good thing for the company. They can invest that money in the business for that time period and hopefully earn a positive return on that money for the company rather than a positive return for the individual employee in their 401(k).
Is it a move that’s friendly to workers? Not at all, obviously. Workers benefit by having their 401(k) matching deposited as early as possible, because it gives more time for compound interest and dividends to work in their favor. Switching to paying 401(k) matching from each paycheck to a 401(k) “bonus” at the end of the year means that the employee misses out on a lot of compound interest throughout the year. That can end up having a real impact – tens of thousands of dollars over the course of a career.
Unfortunately, unless the exact timing of 401(k) contributions is mandated in the employee contract, there’s not much that employees under contract can really do about it.
With regards to your final statement, I think that the things that happen to a person and their loved ones (and, depending on their degree of empathy, others beyond that circle) shapes a person’s political outlook. There is an truly healthy political and economic debate to be had over these kinds of issues… but The Simple Dollar is not the forum for that. Our interest is in helping people with the situation we have now.
Q6: Sensible gift for groomsmen
I am getting married in October. I have settled on spending $200 each on a memorable gift for my three groomsmen. I am looking for some ideas for something that they’ll value and use for a long time. Most of the groomsmen gift suggestions I’ve seen are impractical crap. Suggestions?
– Patrick
My honest suggestion would be to consider what you have in common with each individual groomsman and pick out a truly practical gift that expresses that commonality. This requires some homework and thought, of course, because you’re not just going to go to Amazon and “add three to cart” on some idea.
Sit down and, for each person, ask yourself what interests you share with that groomsmen and what key life experiences you’ve shared with that groomsmen. Then, when you look at that list, ask yourself what practical item touches well on at least one of those things.
There is nothing that beats a gift that speaks to who that individual actually is and what their connection is to you.
While I didn’t have a $200 budget, I did buy each of the people in my wedding party a gift that I thought matched what we have in common.
Q7: Giving up stuff you love
The biggest struggle I’m having in all of this is giving up things I love. I love going to cocktail bars. I love going out to eat at good restaurants. Giving all of that up just for the sake of “financial stability” seems like a terrible exchange.
– Max
Then don’t give up those things.
Instead, spread them out more. Wait until you’ve built up a big head of anticipation before you go to the cocktail bar or to that good restaurant. Savor that anticipation a little. Think about what you’re going to order when you go. Visualize it a few times.
Then, when you go, enjoy yourself thoroughly.
After you go, think back on the enjoyment you got from that experience. Was it really enjoyable? What will you do the same next time? What will you do differently?
Then let that all percolate for a while and let the anticipation build for a while for your next meal at a restaurant or your next cocktail bar visit.
What you want to avoid is making those things routine, so that you don’t appreciate them any more or have only a minimal appreciation.
Q8: Trade school advice?
My oldest son is 17 and has decided after his senior year to go to community college to become a carpenter. It’s a career path that the father of one of his close friends has followed and he has gone to a bunch of job sites and worked on Habitat for Humanity houses.
We have a small amount saved for him in a 529 which should apply to community college. There is a local community college that offers a carpentry program and his friend’s father says that he will help him find work. I don’t think he will have any debt.
What financial advice do you have for him?
– Craig
My number one piece of advice is to save for retirement starting on day one. It’s very likely that in this career path he’ll be responsible for his own retirement savings, so he should take that seriously from day one and open a Roth IRA as soon as he starts his first real job and set up automatic contributions to that Roth IRA. If he starts one at age 20 and contributes up to the limit until he retires, he’ll be able to retire in his mid fifties or so with plenty of money set aside.
This is particularly important in the trades, as a person in their late fifties and sixties may begin to have trouble actually performing the tasks required in that trade, and having a comfortable retirement cushion enables a tradesperson to retire without concern.
I personally feel as though trade work is a fine choice for any young person who is genuinely interested in that trade. People will be needed for trade work for the foreseeable future and construction does not appear to be slowing down in the least.
Q9: 7% average annual return?
When you talk about the stock market returning 7% on average, do you mean after inflation? Because it sure seems like it returns more than 7%.
– Jim
It’s after inflation. I got that number from Warren Buffett:
The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said. Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.
In essence, Buffett believes that stock market growth that’s substantially higher than GDP plus inflation plus dividends is not something that can be expected over the long term any more. With GDP around 3%, inflation around 2%, and dividends around 2%, you wind up with a 7% average annual return.
The stock market has been on a long bull run as of late, one that will eventually correct itself, so I would not judge long term stock market numbers on just data from the 2010s so far.
It is also worth noting that predicting long term stock market returns is a fool’s game, because no one can accurately predict the future. I use the 7% number because it’s a reasonable one.
Q10: Bouncing around streaming services
My husband and I “bounce around” streaming video services. At the end of each month, we’ll deactivate our account on one service and then on the first of the month we’ll activate it on another service. So one month we might have Netflix and another month we might have Hulu Plus and another we might have HBO Now. It takes just a couple of minutes to do it. Then we have fresh stuff to watch because we can catch up on all of the new stuff added in the 3-4 months since we last watched it.
– Maggie
This is a pretty good strategy, especially if you watch a lot of streaming video (ideally, you’ve ditched cable and replaced it with streaming) and you’re attentive to subscribing and unsubscribing to services. This is something I would schedule a calendar alert for.
If you subscribe to Amazon Prime Video (about $10 a month), Netflix (about $10 a month), Hulu Plus (about $10 a month), and HBO Now (about $15 a month), costs start to add up. That’s $45 a month, right there. If you instead rotate through the services (buy Prime for a year, then let it lapse for a few months while you catch up on other services), you’ll save about $35 a month as compared to having all of those services.
We usually pair Amazon Prime Video with one other service that we rotate every once in a while when we’re not finding anything new to watch that interests us. It’s a good money saving strategy.
Q11: Take anything to Goodwill
Trent, I read your article about the boxes you store in the garage for a period of time and then take to Goodwill if you haven’t used anything from the box. I went on a “Trash Tour” in the 90’s, put on by our Solid Waste Authority. At that time, the largest exporter, by weight, in our county was a recyling company that bundled clothing and other fibers to send overseas to fiber poor countries. The old clothing was used to make such things as shingles. Fast forward to 2016, I was at a conference on sustainability and one of the speakers was from Goodwill. She said that they would like all of our used clothing, bedding etc, no matter the condition. They sell what they can in their stores and then sell the rest to businesses that use the fiber. Some is sent overseas as described above. So don’t be picky about what you donate to Goodwill. They have uses for your old clothing you might otherwise throw out. The fiber is put to good use and saves space in our landfills.
– Brenda
My philosophy is that, if I want to get rid of something and I don’t intend to bother trying to sell it, I first check and see if Goodwill wants it. They’ll take a lot of things, and this is the reason why. Someone somewhere probably wants that stuff.
To me, the fact that I can take something that I was on the verge of tossing and give it to someone who will eventually put it in the hands of someone who will use it is far better than just tossing it. I would far rather give an item to someone who would get some value out of it than throw it away where it would just fill up a landfill somewhere.
That’s why anything that isn’t pure rubbish around here usually winds up in a Goodwill box or bag if we want to get rid of it.
Q12: Good audiobooks for road trip
I am looking for some good self improvement audiobooks to listen to on a long upcoming road trip. My library has a huge selection. I am mostly looking for ones that will help me build discipline to stick with things in my life.
– Andrew
Here are two books on that topic that I’ve enjoyed in the last couple of years. I can’t judge the audiobook quality here, but I can say the books were good.
Willpower by Roy Baumeister centers around the argument that we each have a certain amount of willpower during a given day and that it depletes throughout the day. He offers a bunch of solutions for nudging our capacity for daily willpower upwards a little, as well as suggestions for how to “refill” our willpower effectively.
Triggers by Marshall Goldsmith is a book I’ve been high on for a while and mentioned offhand more than a few times on The Simple Dollar – perhaps I should do a series on it. The book’s focus is on orienting your life so that you naturally have triggers that exist that nudge you into better behavior, and he offers a few really great techniques for doing this.
Both of these hit the very points that I think you’re looking for, and I think you’ll enjoy both of them.
Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.
The post Questions About 401(k) Matching, Book Recommendations, Educational Savings, Trade Schools, and More! appeared first on The Simple Dollar.
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The Investment Riskometer
When it comes to investing your hard-earned money, you obviously want it to grow. That’s really the whole point of investing as opposed to keeping it in the bank. But you also know that investing means that you can lose money, and you hate the idea of all that money you’ve saved suddenly disappearing.
So, how do you know which investments will help your money grow without subjecting it to too much risk? There’s no perfect answer, but this post will help you figure it out.
What follows is an investment riskometer that ranks the most popular types of investments from least risky to most risky so that you can find the perfect balance between growth and safety for your personal goals and preferences.
A Quick Primer on Investment Risk
Before we dive into the investment riskometer, there are a few big picture ideas that are important to keep in mind.
First, risk and return are inextricably linked in the world of investing. That is, just about any investment that offers higher expected returns comes with higher risk. You can’t get better returns without taking on more risk. (Though it’s worth noting that increased risk DOES NOT automatically lead to higher expected returns.)
Second, this investment riskometer – and the investment world in general – defines risk as variability in returns. The more the return from a particular investment fluctuates from year to year, the riskier it is.
But it’s important to understand that there are other risks as well. Inflation, for example, is a big risk over long time periods, and a “safe” investment that provides a small guaranteed return may actually face significant risk of losing real value by not keeping up with inflation.
Finally, there are a few simple ways to manage the overall risk of your investment porfolio, no matter which specific investments you choose:
- Emergency fund: Having an emergency fund in place reduces the risk that investment losses will leave you without the money you need to pay your bills.
- Asset allocation: Your overall asset allocation is the primary driver of your investment portfolio’s risk and expected return. The specific investments you choose are less important than your portfolio’s overall balance between stocks and bonds.
- Diversification: Diversification is the practice of spreading your money out over a number of different investments instead of putting it all into just a few, and it’s one of the only ways to decrease risk without decreasing expected return.
Focusing on those principles first and foremost will do more than anything else to keep you from taking on more risk than you’re willing to take.
The Investment Riskometer
What follows is a list of types of investments, ranked from least risky to most risky. But first, a few words of warning:
- This list is not comprehensive. These are by and large the most common investment categories, but there are many different types of investments not included on this list.
- This ranking is general, not definitive. The distinction between certain categories is small and you could easily argue for a different order.
- The future is unknown and just about any particular investment could lose more or less value than any other investment over any given time frame.
With that, I present the investment riskometer!
1. Savings Accounts
A good savings account offers FDIC insurance, a guarantee that your account balance will never decrease, and a known return, though the interest rate will rise and fall as market rates change.
The main risk is that inflation will likely outpace the interest rate you earn. This shouldn’t matter over short time periods, but it can have a big impact over long time periods.
2. Money Market Mutual Funds
Money market mutual funds are a lot like savings accounts. They pay a small interest rate that changes with overall market rates and your account balance will never fall.
The main difference is that money market mutual funds are not protected by FDIC insurance, which could matter in worst-case scenarios.
3. CDs
With a traditional certificate of deposit, you agree to lock your money in the CD for a set amount of time in exchange for a higher interest rate than what you can get from a savings account. The main risks are the penalties involved if you need to withdraw the money early and the fact that in most cases your interest rate will be fixed and will not increase if overall market rates increase.
You can also buy brokered CDs, which are easier to trade than traditional CDs but whose value can rise and fall with the market.
4. U.S. Treasury Bonds
U.S. Treasury bonds are generally considered to be the safest bonds in the world. The value will rise and fall, but they are fully guaranteed by the U.S. government.
5. Municipal Bonds
Municipal bonds are issued by states, counties, cities, and other municipalities. The main benefit is that the interest you earn is exempt from federal taxes, and in some cases exempt from state and local taxes as well. The risk level varies widely, though, and it’s important to do your due diligence before investing.
6. Investment-Grade Corporate Bonds
These are bonds issue by U.S. companies that ratings agencies have deemed to have a relatively low risk of default. There’s more risk than with Treasury bonds, but you may also earn slightly more interest.
7. International Treasury Bonds
Other governments issue bonds, too, and the risk level really depends on the overall characteristics of the country and its government. This is one area where diversification is particularly important so that you’re not too dependent on any single government.
8. High-Yield/Junk Bonds
High-yield bonds – also known as junk bonds – are bonds issued by companies that ratings agencies have deemed more likely to default. You can get higher interest rates, but that comes with greater risk that the bonds will never be repaid.
9. Large Cap U.S. Stocks
Large cap U.S. stocks are stocks issued by the biggest companies in the United States. This is essentially what the S&P 500 represents. Stocks always carry risk, but these are some of the most stable companies in the world.
10. Developed Market International Stocks
Stocks issued by companies from developed markets share many of the characteristics of U.S. stocks, with a little bit of extra risk. They can be a great diversifier, ensuring that you have money invested in companies across the globe.
11. Small Cap U.S. Stocks
Small cap U.S. stocks are issued by the smallest public companies in the United States. These stocks offer the potential for higher returns than large cap stocks, but they come with more risk because they represent younger, less established companies.
12. REITs
REITs – short for real estate investment trusts – allow you to invest in real estate without having to purchase individual properties. They can be a good way to invest in the real estate market in a way that’s more diversified and less labor-intensive than managing properties.
13. Emerging Market International Stocks
Emerging stock markets are generally smaller and less developed than other stock markets. Stocks issued by companies within these markets have the potential to provide superior returns, but they come with an increased level of risk.
14. Investment Properties
Buying individual investment properties can certainly pay off, but they are inherently undiversified. Each property you own represents a significant amount of money invested in a single asset, and it’s a costly asset to boot. That’s not to say that you should never buy investment properties, just that you should do so carefully.
15. Alternative Investments
There are many other alternative investments, from gold, to commodities, to peer-to-peer lending, to collectibles like art and fine wine.
As a financial planner, I generally steer clients away from investments like these. It’s hard to know what to expect and the costs can be significant. There is also often more risk involved than what’s presented up front.
Remember That Risk Is Relative
My hope is that the list above helps you understand a little more about the investment options available to you so that you can make more informed decisions when putting your own portfolio together.
But it’s important to remember that risk is not absolute. You have your own goals and your own preferences, and your particular risks will not be the same as everyone else’s.
Above all, remember that the purpose of investing is never to minimize risk or maximize returns. It’s simply to create and implement an overall investment plan that helps you reach your personal goals. Choosing the right mix of investments one part of that plan that can help you get and stay on track.
Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.
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