The Savvy Investor's Guide: Navigating The World Of Investing

Investing is a great way to build wealth and save for the future, and it doesn't have to be only for retirement. Here are some ways to get started with investing outside of retirement accounts:

- Brokerage accounts: These are non-qualified, taxable investment accounts that offer a lot of flexibility in terms of investment choices, such as stocks, bonds, mutual funds, and exchange-traded funds (ETFs). You can open an individual or joint brokerage account and choose your own investments.

- Education accounts (529 plans): These are designed to save for education expenses but can also provide tax benefits and investment options.

- Health Savings Accounts (HSAs): HSAs offer a triple tax advantage and can be used for healthcare expenses or as a supplemental retirement account.

- Real estate: You can invest in real estate directly or through a mutual fund or ETF. This provides the potential for income and capital appreciation.

- Small business: Investing in a small business as a silent partner or owner offers the potential for high returns but also carries significant risk.

- Annuities: Annuities are insurance products that can provide a steady income stream during retirement. They can be purchased through an insurance company or within a retirement account.

Brokerage accounts

One of the main advantages of brokerage accounts is the amount of control and flexibility they offer. With a brokerage account, you can choose your own investments, rather than being limited to those available through an employer plan. Additionally, there are no restrictions on how much money you can contribute each year, and you can withdraw funds at any time without penalties. This makes brokerage accounts ideal for both long-term investments and shorter-term financial goals, such as saving for a new house or college tuition.

When opening a brokerage account, you can choose between a standard brokerage account, which offers maximum flexibility and access to a wide range of investments, or a managed brokerage account, which comes with investment management from a human advisor or a robo-advisor. Online brokerage accounts are typically lower-fee options that allow you to purchase and manage your investments through the broker's website.

It's important to note that while brokerage accounts do not have contribution limits or early withdrawal penalties, the profits from selling investments are subject to capital gains taxes. Therefore, it's crucial to consider your financial goals, risk tolerance, and time horizon when determining the right mix of investments for your brokerage account.

Real estate

Buying a Home

The first step to investing in real estate is to become a homeowner and pay off your mortgage. This builds equity and boosts your net worth as the value of your home likely increases over time. Once you've paid off your mortgage, you'll have more money to put toward other investments.

Rental Properties

Investing in rental properties can be a great way to bring in extra cash and potentially add thousands to your yearly income. However, it's important to have an emergency fund and pay for the property in cash to avoid the risks associated with taking out a mortgage for an investment property. Being a landlord comes with responsibilities and expenses, such as dealing with renters, repairs, and insurance.

Flipping Houses

Flipping houses involves buying a house, making improvements, and selling it within a short amount of time. This can be a quicker way to make a profit compared to renting out a property, but it also comes with the risk of losing money if the market changes or the house doesn't meet expectations. It's important to have an emergency fund and pay in cash to reduce the risks.

REITs are like mutual funds that invest in real estate instead of stocks. They have improved over the years, and some REITs can perform as well as traditional mutual funds or index funds. However, it's important to choose a REIT with a strong track record and investors who know what they're doing. Don't let REIT investments exceed 10% of your net worth.

Things to Consider

When investing in real estate, it's crucial to have a strong emergency fund to cover any unexpected expenses or vacancies. Additionally, choosing a good location is often more important than finding the cheapest property. Real estate markets can fluctuate, so it's important to consider market conditions and choose properties in high-demand areas to maximize your returns.

Tax Benefits and Liabilities

Small business

Investing in Small Businesses

Ways to Invest in Small Businesses

There are two primary methods of investing in a small business: equity investments and debt investments.

• Equity investment: With an equity investment, you buy a portion of the business and become a partial owner. You may have a voice in how it is run and may receive a share of its profits or sell your stake at a higher price if the business performs well.
• Debt investment: With a debt investment, you lend a specific amount of money to the business, and they agree to repay you with interest.

Who Can Invest in Small Businesses?

For a long time, investing in small businesses was reserved for accredited investors – individuals with a net worth of at least $1,000,000, an annual income of over $200,000 for the past two years, and certain professional financial credentials.

However, the 2012 Jumpstart Our Business Startups Act (JOBS Act) lifted some restrictions, allowing retail investors over 18 to invest in crowdfunding platforms like Mainvest or Honeycomb Credit.

There are still limits to how much money you can invest in these platforms, depending on your income and net worth. If your annual income or net worth is less than $124,000, you can invest up to $2,500 or 5% of either your income or net worth (whichever is greater) over a 12-month period. If your annual income and net worth are each $124,000 or more, you may invest up to 10% of your income or net worth (whichever is greater), up to $124,000.

Benefits of Investing in Small Businesses

There are several benefits to investing in small businesses:

• Potential for higher returns: Small businesses often offer higher returns than investing in the market.
• Support causes that are meaningful to you: You can choose to invest in companies whose goals align with yours, such as businesses that create sustainable products or energy-efficient devices.
• Increased control: As a shareholder in a small business, you may be able to help shape the business's future if your stake is large enough.

Risks of Investing in Small Businesses

There are also significant risks to investing in small businesses:

• Businesses may fail: It is challenging for a small business to survive, and there is a good chance your investment will be lost.
• You may lose money: No returns are guaranteed, and with the high percentage of businesses that fail or struggle, there is a significant chance of losing money.
• Fraud: As with any investment opportunity, there is the potential for fraud.

Things to Consider Before Investing in a Small Business

• The business plan and strategy: What is the business's plan and strategy? What is the current state and future potential of the industry?
• The competitive landscape: What does the competitive landscape look like, and what are the top barriers to entry?
• Financials: How much money does the business need to raise? How much equity, debt, and liabilities does it hold?
• Return on investment: When can you expect to see a return on your investment?
• The small business owner: What is the small business owner's story, and what value does the business bring to the community?

Where to Find Small Businesses to Invest In

You can find small businesses to invest in through crowdfunding platforms, angel investor groups, word of mouth and networking, or local investor groups.

Remember to do your due diligence and carefully consider the risks before investing in any small business.

Health Savings Accounts (HSAs)

A Health Savings Account (HSA) is a tax-advantaged account that is usually paired with a high-deductible health insurance plan. HSAs are only available to members enrolled in a consumer-directed health plan (CDHP).

Each year, you decide how much to contribute to your HSA. The money in the account is put toward the deductible. Once the deductible is met, the insurance covers any additional costs – just like a traditional insurance plan. HSA account holders receive a debit card or cheques connected to their HSA balance to pay for deductibles, co-pays, and other eligible medical expenses.

There are four tax advantages unique to HSA accounts:

• Contributions to HSAs are deductible to you, regardless of the source
• Interest or investment gains on the account aren’t subject to tax
• Funds can be withdrawn to pay for qualified medical expenses without being taxed
• After the age of 65, you can withdraw funds for non-medical expenses without being subject to a penalty (however, they will be subject to income tax)

The contribution limit for an HSA in 2024 is $4,150 for an individual and $8,300 for a family. Individuals age 55 or older by the end of the tax year can make catch-up contributions of an additional $1,000 to their HSAs.

The money in an HSA is yours, even if you change health plans, get a new job, or retire.

Taxable investment accounts

A taxable investment account is a way to buy and sell assets like stocks, bonds, and exchange-traded funds. These accounts can be opened at an online broker or a robo-advisor. The custodian of the securities in these accounts is usually the firm that provides the account.

The "taxable" in the name refers to the fact that any dividend income or profits from the sale of assets must be reported to the IRS for tax purposes. The tax rate that applies depends on how long the asset was owned before it was sold. If it was owned for a year or less, the investor's regular income tax rate, or short-term capital gains tax rate, is applied. If it was owned for more than a year, the long-term capital gains tax rate is applied, which is typically lower than the short-term rate.

When deciding whether to choose a taxable investment account, it is important to consider the tax implications. While taxable accounts offer more flexibility, they do not offer the same tax benefits as tax-advantaged accounts. Contributions to taxable accounts cannot be deducted at tax time, and fees associated with these accounts can eat into returns. However, taxable accounts offer the advantage of tax loss harvesting, which allows investors to offset gains by selling underperforming investments.

In terms of investment options, taxable accounts offer a wider range of choices compared to tax-advantaged accounts. Investors can hold individual stocks, mutual funds, exchange-traded funds (ETFs), and other types of securities in taxable accounts. This makes taxable accounts attractive to investors who want more control over their investments and investment strategies.

Overall, taxable investment accounts can be a good option for investors who have already maxed out their contributions to tax-advantaged accounts or who are looking for more flexibility and liquidity in their investments. However, it is important to carefully consider the tax implications and seek advice from a financial advisor or tax professional.

Frequently asked questions