Working for both short- and long-term financial goals is necessary for successful investing. However, creating an investing portfolio to achieve both types of goals can be difficult. A collection of assets that you purchase or deposit funds into in order to create income or capital growth is known as an investment portfolio.
Real estate, as well as any items you may buy with a brokerage account, such as stocks, exchange-traded funds, mutual funds, bonds, cryptocurrency, and more, are examples of assets. They also include cash on deposit in a money market account or certificates of deposit.
One or more types of accounts may be included in investment portfolios. A 401(k) plan offered by your employer is an illustration. However, you’ll probably add more investment accounts to your portfolio when you add new objectives, such as saving for a down payment on a home or for education. A 529 plan and a high-yield savings account could be part of your overall portfolio.
It’s crucial to take into account how each form of investment account functions both on its own and in combination with the others. Don’t put all your eggs in one basket because you can end yourself investing in the same assets in different accounts without realizing it. As you’re about to learn, not all investments fit all investors’ or goals.
This step-by-step guide empowers you to take control of your retirement plans by building a holistic financial portfolio.
Start by Taking Stock
It is beneficial to establish a list of everything you own before you begin your planning. Assets including vehicles, stocks, bonds, mutual funds, cash, and bank accounts are included. Next, make a list of everything you owe, such as credit card debt and educational loans.
No debts should be excluded from the list. It’s important to know exactly where you are financially in this situation. This results in the creation of a “balance sheet.” It enables you to see all aspects of your finances.
You may create attainable goals for balancing your assets and liabilities and moving ahead if you are aware of what you have and owe.
Fund Your 401(k) With Matching Funds
Many companies match the 401(k) contributions that their employees make. These matching contributions’ dollar amounts can differ significantly between businesses. Matching gifts are free money. Because they don’t realize the worth of time or don’t think they can afford to have their take-home pay cut, some people don’t take advantage of them.
Maximizing your contributions, nevertheless, is beneficial. If your employer matched the first 5% of your donation dollar-for-dollar, you would start seeing a 100% return on that 5% right away.
Consider that 401(k)s grow tax-deferred in your 401(k) until you begin taking distributions—usually after age 59 1/2. There is a high possibility that if you don’t contribute enough for employee matching, it could cost you millions of dollars over the length of a career.
Pay Off High-Interest Credit Card Debt
The next step in building your complete financial portfolio is to develop a plan for paying down high-interest credit card debt. You could use the “debt-avalanche method”:
- Rank your debts by interest rate: From your balance sheet, rank all of your debts by the interest rate you are paying, starting with the highest.
- Allocate as much as possible to debt pay-down: Decide how much you can dedicate to debt reduction each month.
- Attack the card with the highest interest: Pay the minimum balance on all credit card debt except the highest-ranked one. Pay as much as possible on the highest-ranked card until it has been completely paid off.
- Eliminate debts one by one: Cross each card off your list, and put the plastic in a drawer when you finish paying it off. Don’t cancel the card; it lowers your credit score and increases the interest rate. Don’t charge to it again.
- Keep going: Continue this process until all of these accounts are paid in full.
There are other methods for paying off your debts, but the debt-avalanche works well. Remember that you shouldn’t abandon your cards altogether—credit cards can be a valuable financial tool when used responsibly.
Fully Fund a Roth IRA
The Roth IRA is one of the best retirement accounts available to investors in the U.S. Most people qualify—in 2021, if your annual income does not exceed $140,000 (if you are single) or $208,000 (if you are married and filing jointly), you can contribute to a Roth IRA. These limits increase to $144,000 and $214,00 for 2022.
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Contributions—subject to annual limits—are made with after-tax dollars. Roth IRA contributions can also be withdrawn at any time without any penalty.
Once you reach age 59 1/2, withdrawals of earnings are tax-free as long as your account has been open for five years.
In other words, if you purchased $10,000 worth of a stock through your qualified Roth IRA and held it for 20 years, you could sell your shares at retirement, and you would owe Uncle Sam nothing—even if that stock grew to be worth millions of dollars.
Purchase a Home
Saving for a down payment on a house is one of the best ways to work toward completing your financial portfolio. While there are expenses generated when owning a home, you’re converting what was previously an expense (rent) into equity that you can turn into other loans.
Additionally, the interest paid on your mortgage is tax-deductible, and you’re permitted a lifetime capital gains tax exemption of $250,000 (if you’re single) or $500,000 (if you’re married) if you sell your home at a profit.5
Consider your house to be an investment. For example, if you put 20% down on a $100,000 home, you’ve spent $20,000. If it appreciates 4% ($4,000) over the next year, it will worth $104,000.
If you had purchased a stock for $20,000 and received $4,000 in value in one year, you would have an investment with a 20% return rate—an excellent return for the money.
Build Your Emergency Reserves
It’s essential to establish a six-month emergency cash reserve to cover basic living expenses. A reserve helps you pay for any unexpected home repairs, unemployment, or medical bills. At a minimum, your emergency fund should be sufficient to cover up to six months of the following:
- Mortgage payments
- Insurance costs
- Utility bills
- Fixed payments (e.g., car payments or student loan payments)
- Minimum payments on credit cards
The objective for your emergency cash reserve is safety, not return. The simplest option is to park the funds into savings such as a money market account. If you are interested in generating income, consider building a laddered certificate of deposit (CD) portfolio.
To build a laddered CD portfolio with a reserve of $12,000, you could go to your local bank and open six CDs as follows:
- $2,000 30-day (1 month) maturity
- $2,000 60-day (2 month) maturity
- $2,000 90-day (3 month) maturity
- $2,000 120-day (4 month) maturity
- $2,000 150-day (5 month) maturity
- $2,000 180-day (6 month) maturity
As each CD matures, roll it over into a new six-month CD. In short order, you will own six separate six-month CDs, one of which will mature every month.