Investing in income-producing assets can seem like an afterthought when you’re just starting out or preparing for retirement, but there are many advantages to be had by incorporating these types of investments into your portfolio. Income-producing assets include bonds, dividend stocks, and real estate investment trusts (REITs).
One key benefit of such investments is their immediate impact on your cash flow situation. That may sound obvious, but the earlier you can get income from your investments, the better off you’ll be financial.
Understanding your Personal Investment Style
Knowing what types of investments you’re comfortable with, as well as your risk profile, is key to ensuring that you’re taking advantage of the opportunities in front of you. Understanding your investing style will also help reduce your stress levels and allow you to think long-term when making decisions about how your portfolio should be allocated.
Making Sense of Cash Flow, Capital Gains, Liquidity, and Risks
If you’re starting to consider investing your money, you might be wondering about cash flow, capital gains, liquidity, and risks. These are important concepts that apply not only to investing but also in a variety of other life situations as well. We’ll walk through each of these concepts here so that you can gain a solid understanding of what they mean. Then we’ll talk about how they relate to investing. Let’s get started!
A Look at the Current Tax Structure
The Tax Cuts and Jobs Act of 2017 made sweeping changes to tax brackets, corporate taxes, 401k rules, etc. These new laws make it clear that you can no longer bank on traditional income sources; your investments will be taxed at much higher rates than before.
In fact, some federal employee retirement plans have been eliminated altogether due to these changes. This means that even if you don’t need cash right now, it’s crucial to develop a plan for making money in retirement.
The Different Types of Tax Shelters
The most common tax shelters are RRSPs, RESPs, pensions, and TFSAs. Since everyone has different objectives, there is no one-size-fits-all when it comes to tax shelters. For example, an investor with limited capital can get more out of an RRSP than a person with a pension plan—but that person may have additional room in their TFSA instead.
You may have heard a lot about choosing good investments, but what exactly does that mean? Put simply, it means not putting all your eggs in one basket. You want diversification—you don’t want to put all your investments into one type of security or industry.
This can help you weather any changes in global markets, market shifts, interest rates, or other factors that could affect an individual investment dramatically.
How Much Should I Save?
How much you should be saving depends on how close you are to your goals. If you’re retired or near retirement, then a dollar-cost average of 10% into an index fund may make sense. But if your children’s college education is still more than 15 years away, it might be worth taking some risk with 50% stocks/50% bonds.
Keeping it Simple
Research has found that making you’re investing too complicated can lead to subpar performance. This is especially true when it comes to investing for income, as opposed to growth. When it comes time to invest, choose a strategy that’s simple, easy to understand, and isn’t complicated by secondary objectives (e.g., balancing your portfolio). Simplicity is underrated in modern finance.