Personal Investments: When To Take The Plunge

Personal investments are a broad topic, covering everything from managing expenses and debt to saving, investing, and planning for retirement. It involves developing strategies for budgeting, creating an emergency fund, paying off debt, and using credit cards wisely. One's income, spending, savings, investments, and protection are all part of the personal investment equation.

Personal investment is about meeting personal financial goals, which could include anything from having enough for short-term financial needs to planning for retirement or saving for a child's education. It depends on income, spending, saving, investing, and personal protection, such as insurance and estate planning.

There are various vehicles for personal investment, including personal loans, personal investment companies (PICs), and retirement accounts such as 401(k)s and IRAs. When considering personal investments, it's important to evaluate one's financial situation, risk tolerance, time horizon, and knowledge of investing.

Personal loans for investing

Personal loans can be used for almost any purpose, including investing. However, there are serious risks involved in using a personal loan for investing, and some lenders may prohibit the use of personal loans for this purpose.

When to Use a Personal Loan for Investing

Using a personal loan for investing may be a good idea if:

• You are pursuing career growth: In some professions, a special certification or professional license is required for career advancement. A personal loan may be one of the only options for funding continuing education.
• You are boosting your earnings: A personal loan can help fund a side hustle or small business, allowing you to turn a hobby or passion project into additional income.
• You have excellent credit: A high credit score gives you a better chance of qualifying for a low-interest rate on a personal loan, reducing the risk of losing money on the loan.
• You can afford the monthly payments: If you are confident you can afford the loan payments, regardless of the performance of your investment, then taking out a personal loan may be a viable option.

When Not to Use a Personal Loan for Investing

Taking out a personal loan for investing may be a bad idea if:

• The investment is risky: Adding debt to a risky investment makes your investment strategy more volatile. Low-risk investments include bank deposit products like money market accounts and savings accounts, which are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
• You have a lower credit score: A lower credit score means you won't qualify for the lowest interest rates, and the cost of the loan may outweigh the potential investment return.
• You can't afford a failed investment: No investment can guarantee returns, and you will need to start repaying a personal loan immediately, even if the investment doesn't deliver.
• You are at or nearing retirement age: As retirement approaches, it's generally recommended to reduce expenses and avoid taking on additional debt, as this could put your retirement savings at risk.

What to Consider Before Borrowing to Invest

Before taking out a personal loan for investing, consider the following:

• Investment knowledge: Understand the different types of investments and their associated risks.
• Current loan rates: Financial institutions often set interest rates based on the federal funds rate, so it's worth considering the current economic climate.
• Financial portfolio: Consult an investing advisor to determine if taking out a personal loan aligns with your investment strategy and risk tolerance.
• Personal risk tolerance: Consider your comfort level with potential losses and whether a safer or more aggressive investment strategy is a better fit for your needs.

Personal investment companies

A personal investment company (PIC) is a private limited company used as a long-term investment vehicle. It is a viable alternative for individuals and families looking to retain and grow their wealth.

There are several advantages to using a PIC:

• PICs can retain profits for investment, rather than profits being withdrawn and subject to higher rates of personal tax by shareholders.
• PICs can invest in a range of investments, including cash, shares, investment funds, and property.
• The rate of tax for a company is lower than that of an individual.
• Profits generated from investments can be paid into a pension fund, attracting tax relief for the company.
• Profits made by a trading company can be lent to the PIC for investment purposes, allowing the trading company to focus on its core activities.
• An individual can lend money to the PIC for investment and, if needed, receive tax-free repayment of that money.
• PICs can be used to fund university costs for adult children, who can be shareholders and receive dividends without paying taxes on them.
• PICs offer inheritance tax planning opportunities, as investment growth falls outside of an individual's estate, resulting in tax savings.

When deciding whether to use a PIC, it is important to consider the specific circumstances and goals of the individual or family. It is also crucial to seek professional advice from a qualified financial advisor or accountant to ensure that the structure and strategy are appropriate for the specific situation.

Managing personal finances

Create a budget

The first step to managing your finances is to create a budget. This involves adding up your monthly income, including your salary, bonuses, tax refunds, and any other sources of income. Next, calculate your monthly expenses, such as housing, food, student loans, transportation, entertainment, and utilities. Subtract your expenses from your income, and this will be the starting point for your budget. Remember that your budget is a living document, so you can make adjustments as needed.

Save for retirement

Consider investing in a retirement account to save for the future. Options include 401(k) plans, 403(b) plans, individual retirement accounts (IRAs), and Roth IRAs, each with different tax implications and features.

Build an emergency fund

It is essential to have some savings set aside for unexpected expenses, such as car repairs or medical bills. Aim to save at least three months' worth of essential expenses in an instant-access savings account.

Get your debts under control

Focus on paying off debts with the highest interest rates or late payment charges first. Make sure to always pay at least the minimum payment on credit cards and loan agreements to avoid penalties.

Protect yourself and your family

Consider different types of insurance cover to protect your income, health, mortgage, loan payments, or dependents. Evaluate the risks and benefits of each type of insurance and decide what is most important for you to protect.

Create a diverse portfolio of investments

If you have savings, consider investing in a variety of asset categories, such as stocks, bonds, and cash. Diversifying your investments can help protect against significant losses and smooth out the overall investment returns.

Take advantage of employer-sponsored retirement plans

Many employers offer retirement plans, such as 401(k)s, where they will match some or all of your contributions. This is essentially "free money" for your retirement savings, so take advantage of it if possible.

Investing in yourself

Financial Investments

• Start a retirement fund: The earlier you start saving for retirement, the more money you will likely accumulate over time. Consider employer-sponsored plans like a 401(k) or a 403(b) tax-deferred retirement plan. Alternatively, look into Individual Retirement Accounts (IRAs) or Roth IRAs, which offer tax benefits.
• Set financial goals: Set both short-term and long-term financial goals. For example, you may want to save for a vacation or pay off student loans.
• Save for emergencies: Build an emergency fund to cover unexpected expenses, such as car repairs or replacing a broken laptop. Keep this money easily accessible in a savings or checking account.
• Grow your savings: Put your money in a high-yield savings account to earn a higher interest rate. Explore options like money market accounts or certificates of deposit (CDs) to maximize your savings.

Career Development

• Education and skills: Invest in your education by pursuing degrees, trade schools, apprenticeships, or certifications. Continuously learn new skills to stay relevant in your field and become more competitive in the job market.
• Networking: Expand your professional network by connecting with industry professionals, attending events, and seeking mentorship opportunities.
• Side hustles: If you have a passion, consider turning it into a side gig. This can bring additional income and provide an outlet for creativity and personal growth.

Self-Care

• Physical health: Prioritize your physical health by exercising regularly, eating nutritious foods, and staying hydrated. Getting enough sleep and managing stress are also essential for maintaining your overall health.
• Mental health: Take care of your mental well-being by setting boundaries, practicing self-care, and seeking professional help if needed.
• Personal development: Invest time and energy into activities that nurture your hobbies, passions, and relationships. Learn a new instrument, volunteer, practice gratitude, and set aside time for friends and family.

Remember, investing in yourself is a journey towards becoming the best version of yourself. It empowers you to handle life's challenges and seize opportunities, leading to a more satisfying and balanced life.

Investing in higher-risk assets

Understanding Risk and Returns

It is essential to recognize that high-risk investments may offer the potential for higher returns, but they also put your capital at greater risk. While there is a chance of achieving substantial returns, there is an equally high possibility of losing all your invested money. It is important to remember that there is no guaranteed correlation between risk and reward. Therefore, when aiming for substantial payouts in a short time, you must be prepared to accept a disproportionately higher level of risk.

Types of High-Risk Investments

High-risk investments encompass a range of options, including crypto assets, mini-bonds, contracts for difference (CFDs), options, initial public offerings (IPOs), foreign emerging markets, real estate investment trusts (REITs), high-yield bonds, and currency trading. These investments often promise high yields in a short period, but the likelihood of unattractive losses remains.

Investor Suitability

High-risk investments are generally not suitable for inexperienced investors. They are intended for those with a solid understanding of the risks and opportunities presented by these investments and the financial capacity to absorb potential losses. If you decide to venture into high-risk investments, it is recommended to allocate no more than 10% of your total net assets to this category, ensuring the rest is diversified across mainstream investments.

Risk Assessment

When considering high-risk investments, it is crucial to assess the likelihood and potential impact of negative outcomes. Think in terms of the odds that an investment will fail to meet expectations and the magnitude of potential losses. Diversification is a crucial aspect of risk management, as it reduces the chances of portfolio underperformance and minimizes the severity of potential losses.

Regulatory Protection

It is important to note that many high-risk investments are not regulated and may not offer regulatory protection. For example, investments in commodities, student accommodation, and crypto may lack access to regulatory safeguards provided by financial authorities. Therefore, investors must be cautious and thoroughly understand the risks before committing their capital.

Frequently asked questions