Abstract
Investments are an important part of financial planning. When looking at investments there is a need to examine the different options available to people. Different people have different investment needs. The investment option chosen should address the specific needs of the investor. For example, there is the case of Lauren Crowford, a 23-year old that graduated recently and has just gotten a job. Her employer has a 401(k) to which she can contribute up to 6 percent of her salary. She had also opened an individual retirement plan (IRA) two years ago. She is seeking advice on whether to participate in her employer’s 401(k) retirement plan. Next, there is Carrie Savarin, a 25-year-old nurse practitioner with the local health department. She has a credit card debt and is seeking advice on whether to obtain a loan to buy a car. Lastly, there is Darrel Cochrane, a 31-year-old optician. He has 11 credit cards, varying in annual percentage rates. The cards with the highest annual percentage rate are the ones with the highest amount of outstanding debt. He is seeking advice on the use of credit cards as a source of finance.
Discussion
I would recommend that Lauren Crowford participates in her employer’s 401(k) retirement plan. When investing in her employer’s 401k retirement plan, Lauren Crowford should find out her company’s matching policy. The contribution she makes should be based on the percentage the employer will match. If possible, she should contribute the maximum percentage that her employer will match. For example, if her employer can match up to 6 percent, then she should contribute 6 percent of her salary to take full advantage of the employer’s matching. This would allow her to get the most from her contribution. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
Lauren Crowford can also get the benefit that 401k plans offer by purchasing mutual funds through her 401k plan. Lauren Crowford’s contribution and earnings on investment will be tax-deferred. She can also draw from her earnings from the account as a loan to herself (Specific mutual Fund Investment Ideas for Beginners, n. d.).
Investing through her employer would also reduce Lauren Crowford’s retirement worries because she would know for as long as she stays employed with the firm where her money is being invested, she is safe. She would be allowed to transfer her funds to any other retirement account if she chooses to leave. Investing in mutual funds through her employer allows the funds to be managed by the employer and is free from fees to the employee. Lauren Crowford still has the option of choosing her funds and diversifying and having liquidity. Lauren Crowford should know that 401k plans allow investors of any size to have access to equity, bonds, and securities (Specific mutual Fund Investment Ideas for Beginners, n. d.)
Lauren Crowford should also continue contributing to her retirement plan (IRA), and should contribute more than the $ 1,000 she was contributing as a student. I would suggest that she contributes a percentage of her income so that when her income increases, her contribution also increases. She should also consider the time value of money when deciding on the amount to contribute because a dollar earned today would most likely be worth much less in the future. (German & Forgue, 2008). This is because people would generally prefer to receive money now, rather than in the future. Therefore as time passes, the purchasing power of money declines and money is said to have lost value. For this reason, if you want to compare the value of a dollar that you receive now to one that you will receive ten years to come, you will have to discount the dollar that you will receive ten years to come into its present value. This is done by multiplying the one dollar by the present value interest factor at 10 years, given the prevailing interest rate. Both the 401(k) retirement and the individual retirement plan (IRA) will enable them to defer tax on her contributions. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
This means that her contributions would be deducted from her salary before it is taxed. This tax saving would have been compounded by the time Lauren retires. For example if the rate of tax is 10 percent and Lauren still earns $ 45,000 per annum. If Lauren contributes 6 percent, which is $ 2700. The tax saving would be 10 % * 6 % * 45000, which is $ 270, which he can invest to earn more. Lauren Crowford has age on her side, so she has time to learn to become a little more disciplined. Lauren should first start by paying herself. She should look for a good money market account that would allow her to create and build her funds for investing in a mutual fund that can provide her with steady growth. (German & Forgue2008). Lauren Crowford should consider the possibility of future homeownership, towards which she should start saving. Investment time horizon refers to the length of time before Lauren Crowford needs to sell her investment. Investment time horizons can be short-term, medium-term, and long-term investments. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
For Lauren Crowford, since she is looking to retire in 40 years she could go with long-term investment. Lauren Crowford’s investment time horizon is long term and is taking a bigger risk therefore she should enjoy a good return on her investment. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
Carrie Savarin should take advantage of her employer’s matching contribution and save the maximum possible 6 percent to her employer’s retirement plan because it qualifies for a tax shelter. Her employer will also match her contributions, so the higher she contributes, the more free money she is entitled to from her employer. (Specific mutual Fund Investment Ideas for Beginners, n. d.).
Carrie Savarin can also get the benefit that 401k plans offer by purchasing mutual funds through her 401(k) plan. Carrie Savarin’s contribution and earnings on investment will be tax-deferred. She can also draw from her earnings from the account as a loan to herself (Geary, L., 2007). Investing through her employer would also reduce Carrie Savarin’s retirement worries because she would know for as long as she stays employed with the firm where her money is being invested, she is safe. She would be allowed to transfer her funds to any other retirement account if she chooses to leave. Investing in mutual funds through her employer allows the funds to be managed by the employer and is free from fees to the employee. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
Carrie Savarin still has the option of choosing her funds and diversifying and having liquidity. Carrie Savarin should know that 401k plans allow investors of any size to have access to equity, bonds, and securities (Specific mutual Fund Investment Ideas for Beginners, n. d.)
Carrie Savarin should open an individual retirement plan (IRA), in addition to her employer’s retirement plan. The individual retirement plan (IRA) is funded at the discretion of the person who sets up the account (German & Forgue, 2008). If Carrie opens a Roth IRA she will not have to pay taxes on the earnings. Next, I would recommend that she clears her credit card debt so as to increase her chances of obtaining a loan to buy a car. Alternatively, she can also save and buy the car from her savings. Obtaining a loan to buy a personal car is not wise, since the car will not be generating any revenue to assist in repaying the loan. If possible, loans should only be used to finance projects that will earn a higher income than the interest charged on the loan. For example if the funds from a loan are invested, the return on the investment should be more than the interest to be paid on the loan. Using a loan to buy a car would disorganize Carrie’s financial planning because the loan would have to be repaid, but it would not have been invested. Therefore this would mean that Carrie uses her salary to repay the loan. This in effect means that Carrie would have less disposable income. Carrie should also consider the possibility of future homeownership, towards which she should start saving. Investment time horizon can be short term, medium term, or long term investments. For Carrie Savarin, since she is just 25 and is not likely to retire in less than 30 years, she could go with a long-term investment. Carrie Savarin’s investment time horizon is long term and is taking a bigger risk therefore she should enjoy a good return on her investment. (Specific mutual Fund Investment Ideas for Beginners, n. d.)
First, the number of credit cards held by Darrel Cochrane is just more than he may actually need. I would recommend that he first gets rid of the entire retail store cards, because they have a tendency of encouraging impulse buying and overspending. All his retail store cards also have higher than 21 percent annual percentage rates, which is higher than the annual percentage rates on his bank cards. Currently, he pays around $350 per month on credit card interests. This expenditure can be reduced drastically by stopping the use of retail store cards, then transferring his debt from the more costly credit cards to the less costly bank cards. He can borrow the maximum possible amount from the 11 percent and 12 percent annual percentage rate bank cards then use the money to clear the amounts he owes on the 24 percent and 19.6 percent annual percentage rate credit cards in that order. If there are still any balances outstanding on the 24 percent and 19.6 percent annual percentage rate credit cards after borrowing the maximum on the 11 percent and 12 percent annual percentage rate bank cards, then he can borrow from the 15 percent annual percentage rate bank card to clear the outstanding balance. He should then struggle to clear the amounts owed on the bank cards from his income, beginning with the 15 percent annual percentage rate bank card, followed by the12 percent annual percentage rate bank card, and finally the 11 percent annual percentage rate bank card. As he repays the amounts owed on the cards, he should try to pay for his expenses from his income or at least pay using a card with the lowest annual percentage rate. His main focus should be to remain with only the 11 percent annual percentage rate bank card. All the other cards should be returned to the providers. When he has reduced his credit card debts to a manageable level, he should then apply for a loan that charges less than 11 percent interest per annum to clear his credit card debts so that he remains with one cheaper loan. (Kennon, J., n. d.).
Reference list
Geary, L. (2007). Retirement Planning for People in Their 40’s, Web.
German, T., Forgue, E. (2008) Personal Finance, Boston & New York: Houghton Mifflin Company
Kennon, J. (n. d.). Dollar Cost Averaging. Web.
Specific mutual Fund Investment Ideas for Beginners (n. d.). Web.