Invest Gen Y

Dear Young Adult,

It’s time to get into a bit of detail and start to organized into groups the vehicles that will be holding your greenbacks.  What do we know that needs to be said again with an “Ah Ha” at the end?  It is this: An IRA account is non-taxable.  Thus I pay no taxes on the dividends or gains for a good number of years.  Ah Ha!  I pay no taxes while the money is in the account.  This fact is going to drive the decisions you make.

The other thing we need to say out loud is this: a regular savings or brokerage account is taxable.  So if my investments earn interest, or pay dividends I have to pay taxes on this additional money.  Further, if you sell something and it’s gone up in value (excellent), you then have to pay the government taxes on the difference (sales price minus cost basis).  This will also drive the decisions you make.

Mini recap: IRA – nontaxable.  Regular savings or brokerage – taxable.

Here’s the part that makes total sense.  Some stocks pay dividends (these are the companies that are profitable – maybe).  And dividends are income.  So put these in your IRA and avoid the taxes for a while.  Conversely, some stocks don’t pay dividends (growth companies that are still building the business – maybe).  No dividends, no income, no tax bill, I say put these in your regular savings account.

And don’t worry, I haven’t forgotten that you are busy building your life and may not have time to pick individual stocks.  You want mutual funds which come in all shapes and sizes.  Some hold companies that pay dividends, some focus on growth companies, and there are a gazillion other types, so our thought process and planning holds whether you buy individual companies or mutual funds.

I know what you’re thinking and it’s this: What about bonds?  Don’t I need a well balanced portfolio of stocks and bonds in order to reduce risk?  And to this I reply: You’re a genius.

My next blog will be about bonds.  It’s going to be great, so stay tuned young investor and follow me on Twitter @cmchristian17

May you always have interesting income,

Connie