As a parent of a new teen driver, having your teen get their license is enough to cause you to break into a cold hard sweat. Not only do you now have to worry about the safety of your teen behind the wheel, but your auto insurance premiums could go through the roof.

Why is Teen Insurance so Expensive?

Teens cost more to insure for good reason. The rates are typically higher for teens than other drivers because they pose a more significant risk of accidents than experienced drivers. Teen drivers are also more likely than the average driver to get tickets. The National Highway Traffic Safety Administration (NHTSA) says that the leading cause of death for teens is motor vehicle crashes and make up more than a third of all deaths of teens between the ages of 16 through 19. According to the CDC, in 2020, 2,800 drivers between the ages of 13 to 19 were killed in motor vehicle crashes. In addition, male drivers have over three times the death rate compared to female drivers of the same age. According to CarInsurance.com, your insurance premium will increase, on average, by 102 percent when adding a teen to your policy. In some states, it can be even higher than 139 percent.

What are Parents Required to Do?

Most insurance companies will require that all licensed members of your home be added to your policy, regardless of whether they are driving your vehicle or not. You do not have to add teens if they only have a learner’s permit. That does not mean that you do not have to notify your insurance agent when your teen gets their learners permit, you do, but there should be no charges to your policy since your teen is not listed. Once your teenager gets his license, you have to either take out a separate policy or add them to your own. You also need to contact your insurer to ask about their rules if you are divorced and only have custody part-time. Typically, the parent who has primary custody adds the teenager. That is not always the case, however. If you have multiple vehicles, you may be able to save money on premiums by limiting your teen to driving only a single car. However, to avoid paying a premium for your teen on other vehicles, you will need a named exclusion. That is where you and your insurance company agree, through an endorsement to your policy, that your teen does not have coverage on those vehicles. As a result, your teen does not get coverage for any claim caused by them either.

How Can I Add a Teen Most Cost Effectively?

It is often less expensive to add a teen to an existing policy instead of buying a separate one, which most parents do. However, there are other things you can do to reduce the cost of adding a teen driver to your insurance. It is also better to add your teenager to your current insurance while sharing a car rather than purchasing them a new car.

Take Advantage of Discounts

Many insurance providers provide discounts. For example, the Good Student Discount is one that insurance providers offer to students who maintain good grades (B average or higher). Others offer programs, such as educational videos, online safety courses, contracts between parents and teens, and driving logs to foster safe driving habits. Some insurance companies subsidize the costs of electronic gadgets, such as GPS tracking devices, which parents can install in their cars to monitor their teen drivers. Then they offer discounts to the policyholders whose teenagers use the gadgets. That is part of a concerted effort to reduce teen-involved crashes.

Drop Collision and Comprehensive Coverage

You can save some money on your policy by dropping comprehensive and collision coverage on older cars that are not worth that much more than the deductible itself. Chances are, with an older car, you will pay more in the premiums than you would receive from the insurance company if your vehicle is totaled. You can research Kelley Blue Book to see your car’s value.

Get a Safe Car

Not only will you be able to sleep better knowing your teen is driving a safe car, but your premiums will be cheaper as well.

Take Advantage of Bundling

You will likely receive a multi-policy discount if you have both a homeowners and auto insurance policy with the same insurance company. By adding an umbrella policy, you can even get another discount, which offers additional liability coverage beyond the limits of your auto insurance.

Consider ‘Pay-as-you-go’ or Usage-Based Insurance

For this insurance policy, they install a device that monitors the driver’s driving behavior. When drivers display good driving habits, they receive a financial reward. That’s a positive way to keep an eye on your teen’s driving and save some money as well. The bottom line is this: there are always ways for you to save money on your insurance premiums while keeping your teen safe at the same time. Give your insurance company a call to get a quote and discuss the number of options you can implement to save on adding your teenager to your auto insurance policy. Of course, your main priority is to keep your teen safe while they are behind the wheel; saving money on your auto insurance is a bonus.

Auto Insurance and Teen Drivers

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Most parents worry about their children as they grow up; however, you’d think that would stop once they reach adulthood. Parents always look to set their children up for a successful future. They might be helping out with their first car, paying for higher education, or assisting them in purchasing their first home. Parents may also choose to open and operate a guardian IRA, or custodial IRA, for a child or someone who is disabled.

Understanding a Custodial IRA

Parents or legal guardians are responsible for managing a custodial IRA for their child or disabled adult. Typically, this will include the guardian signing all the legal paperwork since the other person cannot. The parent or guardian usually uses a custodial IRA to assist with setting their child up for financial success once they reach retirement age. Even though a legal guardian manages the account, the child or disabled person still owns it. Then, once the child reaches the age of 18 or 21, depending on the state, they’ll have the account transferred to them for proper handling. Disabled individuals would receive complete ownership once they can handle their finances. There are two common types of custodial IRA accounts – Traditional and Roth.

Custodial IRA Account Benefits

One of the most important things we can do for our children is to teach them financial responsibility at a young age. Maintaining funds and establishing savings will help them apply those skills to their future finances. People typically do not consider retirement funds until they reach their late 20s to 30s. However, by creating a custodial IRA for your kid, you’ll be able to kickstart their retirement savings and help them prepare for the future. You can withdraw money from a Traditional IRA or Roth IRA anytime. The main difference between the two accounts is how the funds are affected by taxes. A Traditional IRA will face tax penalties for an early withdrawal, while a Roth IRA does not. The ability to withdraw your funds from a Roth IRA without penalty will only assist with managing emergencies, attending college, or other money-related concerns.

Using a Custodial IRA Account

The first step when setting up a custodial IRA is choosing the right financial institution. Next, you’ll need to provide general information for whomever you’re opening the account with, including their social security number, employment information, annual income, and banking information. The account is typically set up in the child’s name and then funded by taxable earnings regardless of age. The funds can come from babysitting, dog walking, or a W-2 job once they reach legal age. However, the maximum limit for 2023 is $6,500.

Takeaway

A Roth or Traditional custodial IRA is an excellent option for setting your child up for a successful retirement. However, remember the main differences between the two types of accounts. In addition, educating your children on the importance of saving money will only help them in the future when it comes to managing their finances.

What Is a Custodial IRA?

View Resource What Is a Custodial IRA?
Mistakes are common when filing and paying your taxes. In such a case, it’s best to know what types of penalties you can incur and how to calculate them to stay better prepared.

What’s a Tax Penalty?

Your income tax returns are filed directly with the Internal Revenue Service (IRS). However, you can face a tax penalty if you have underpaid your quarterly taxes, missed a deadline while filing those taxes, or have had a check used to make tax payments bounce. In addition, you can still get a penalty even if the IRS owes you a tax return. The IRS will always send a notice if you incur a tax penalty. Typically, they calculate the tax penalty based on the following equation: Total Tax – Refundable Credits = Total Tax on Return Penalties are calculated based on:

Types of Tax Penalties

You can incur a penalty for a variety of reasons.

Failure to file your income tax return:

The IRS does offer an extension for those who fail to file their tax return before the due date. However, you will incur a penalty if you fail to file during the extension period. The incurred penalty charges 5% of the tax due every month or part thereof, exceeding the time for return filing. Eventually, the amount caps at 25% (5 months) of your balance. However, if you file your return 60 days late, you’ll incur a penalty of $435 or 100% of the tax owed, whichever is less for returns due after 1/1/2022. To avoid tax penalties, file your tax return before the due date (or the extended period). When you’re expecting a return, you will not incur a penalty. However, when you’re getting a return, file it within three years of the due date or risk losing the refund.

Failure to pay the due taxes:

To avoid penalty, you’ll need to pay all your taxes before your return’s due date. If you have unpaid taxes before the stipulated date, you’ll incur a penalty of 0.5% of the tax payable per month that maxes out at 25% of the tax due. Although both penalties can occur in the same month, the penalty for failing to file your return decreases by the penalty for failing to pay your taxes. The maximum combined penalty caps out at 5% per month. If you want to avoid the penalties, pay all your taxes before their due date.

Failure to pay the estimated tax:

Since the IRS follows a “pay-as-you-go” system, typically, you pay your taxes throughout the year as you receive income. You’ll incur a penalty if you owe more than $1,000 in taxes. To avoid a tax penalty, you need to pay quarterly estimated taxes, typically due on: Calculating your taxes each year can be challenging. However, the IRS does offer a ‘safe harbor’ method when calculating your estimated payments. You can avoid an underpayment penalty if:

Dishonored Checks:

If the check you sent to the IRS gets returned, they will charge a 2% penalty of the total check amount, maxing out at $1,250. Therefore, the fine is $25 or the total amount of the check, whichever is less.

Avoiding Tax Penalties

You can easily avoid tax penalties by ensuring that you pay all of last year’s taxes. Try following the steps below to prevent future tax penalties:

Takeaway

Filing returns and paying your taxes tend to be a tedious process. If you’re looking to avoid penalties altogether, ensure you get all the information together and pay your taxes on time.

Avoiding Tax Penalties

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If you’re contemplating selling products online for the first time, there are some things to consider and decisions to be made. First, due to the ongoing pandemic, there has been an increase in online shopping. According to Adobe’s 2022 Holiday Shopping Forecast, they expect online holidays sales to total at $209.7 billion dollars, which is a 2.5% increase from the year prior. Each year, growth in e-commerce sales continues to rise. According to ComScore, the growth of e-commerce has now outpaced the growth of overall commerce in the US. Entrepreneurs want to get in on this and profit from this growth. So what does it take to sell products successfully online? First, you have to decide whether you want to set up your own online business or work with a third party.

Setting Up Your Own Online Business

Domain Name and Hosting

The first step to take when setting up your own online business is to choose a domain name and hosting. Your domain name should be strong and memorable. It will enable your visitors to find your online store more efficiently, remember it, and enable you to build your brand. Regarding hosting, be sure to consider your store’s long-term goals before deciding on a provider, as there are many web hosting providers offering a variety of features.

Online Merchant Account

Since customers who shop online will often use credit cards to pay for their purchases, setting up an online merchant account is essential. That will allow you to take and process payments and have the money transferred directly to your business bank account. In addition, you will most likely need to work with a ‘payment gateway’ or payment service provider for security reasons. PayPal is another payment option that will allow your customers to use their credit cards and other forms of payment if shopping internationally.

Your E-Commerce Storefront

There are several storefronts to choose from depending on your particular needs. There are:

Your Products

Since your customers are not in a physical store where they can touch your products, it behooves you to replicate this experience as much as you can. You can do this by providing many details and descriptions of your products, including dimensions and weight. Include a zoom feature to enable customers a close-up look at your products. Also, having an online video showcasing and demonstrating the product is ideal.

SSL Certificate

By obtaining an SSL Certificate, you ensure to your customers that shopping at your e-commerce store is secure. That not only keeps your customer’s information but also provides your small business with credibility.

Third Party Selling Opportunities

If you are looking to sell products online without setting up an e-commerce website yourself, working with third parties might be best for you. These sites allow individuals and businesses to sell their products and earn commissions. However, there are some necessary things you want to follow first to make the most of this option. First, you want to determine what you wish to sell. You want to find unique products and offer an excellent market opportunity. Next, you will want to strategize as there is so much competition. You have so many options at your disposal, including big names like Amazon and eBay, where you can set up shop. Because you have so many options, you should research them and find a trustworthy provider. Not all providers are the same. You want to go with one that is easy to work with, will offer reliable e-commerce solutions for selling your products, provide professional-looking websites, and is user-friendly. In the end, you want to leave your customers with a fantastic virtual shopping experience. Since they do not get the instant gratification of exiting a brick-and-mortar store with a purchase in hand, you want to replace that by providing a great online shopping experience.

Selling Your Products Online

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An online presence is a must for any business. According to eMarketer’s 2022 Global Ecommerce Forecast, they estimate that online sales in the U.S. will consistently grow between now and 2025. eMarketer’s forecast expects U.S. e-commerce sales to reach over $1.6 trillion by 2025. Those figures represent just the online sales of goods. The numbers do not include the sale of services or local transactions where initial contact or comparison shopping began over the Internet. The bottom line is that if you are not on the web, you are missing out on a significant market for your goods and services. Many small businesses put off establishing themselves online because they are confused by Internet marketing concepts. In actuality, although the medium is different, Internet marketing concepts stay the same. To make the most of your online shop, you need to learn what makes the web different and make the most of its strengths for your business. Here is a look at five basics you need to understand.

Website

A website that is appealing and engaging is step number one. Like a clean, well-lit, and welcoming storefront, a well-designed site attracts visitors. If customers like what they see and can quickly get their questions answered, they will probably buy from you. If you already have a website but are attracting few paying customers, have a professional review your site. Evaluate your content. Does it answer questions? Is it exciting and practical? Ask friends and visitors how easy it is to navigate through your site. If it is confusing, visitors will leave. Consider utilizing a usability testing firm to provide you with feedback on the effectiveness of your website. Do you use attractive and professional-looking graphics, photos, and even video? They are essential attention-getters because you only have a second or two to convince visitors to stay on your site longer.

Search Engine Optimization

Usually called SEO, search engine optimization means appealing to the algorithms used by the different search engines, like Google, Bing, and Yahoo. Typically, most of your search engine traffic will come from the behemoth Google. Your goal is to get on the first page of the search engine results and preferably in the top five. You do this by consistently updating your content with valuable, engaging copy. For example, use keywords in your website text that matches what you believe to be potential customers’ most popular search terms. Also, take advantage of social media, use quality backlinks on your site, and make use of Google+.

Email Marketing

Using email efficiently is the best way to stay in touch with prospects and customers. Try providing them with helpful content and offer them sales opportunities periodically but not too often. Over time, you will build brand recognition and customer loyalty. Online, everyone complains of overstuffed inboxes. The way to get people to look forward to your emails is to send just a few emails, but pack them with genuinely helpful advice and excellent deals tailored to their needs. If you follow this formula, your emails will get read instead of immediately deleted.

Social Media

Due to the many social media platforms, knowing where to make your mark can be confusing. You are better off choosing two or three and consistently updating your content, and regularly engaging with followers. Facebook, Twitter, Instagram, TikTok, Pinterest, and LinkedIn are the big ones. However, there are many other smaller spots on the net where prospects gather. Find out your target audience and set up an active, engaging, and entertaining presence.

Content Marketing

You cannot confine yourself to a blog or website copy. Content marketing means spreading the word about your brand, products, and services using every type of communication method available on the web. That certainly includes your blog, website copy, email, and social media posts. Go beyond those essentials with ebooks, whitepapers, press releases, podcasts, infographics, photos, graphics of all types, and especially videos. There is a reason that more than 75% of all marketers now use video content on their sites, and YouTube has more than a billion visitors each month. Learn which types of content work best for your audience and do more of it. Then keep it updated and fresh. You need to be online. The days when it was optional are long over. If you are not online now, start small with a website and gradually add all the elements discussed. It is a wise investment in your business’s health, longevity, and profitability.

Internet Marketing Basics

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Being underwater on your mortgage does not refer to having a flooded home. Instead, it means that your current debt on the house is higher than the current value of your home. Unfortunately, this situation occurs far more often than anyone wants to admit. In fact, according to Irvine, California-based ATTOM Data Solutions, in the third quarter of 2022, 2.9 percent of American homes had a combined estimated balance of loans that were at least 25 percent more than the market value. Fortunately, those numbers have fallen dramatically in the last five years — though that offers little comfort if you are one of the nearly 5.2 million homeowners currently facing a negative equity situation in your home’s value. A condition, as it happens, that makes refinancing or selling your home extremely difficult. These are a few options to consider if you find yourself in this situation.

Stay Put

One option to consider is to remain in your home rather than attempting to sell it for a probable loss. Even if you face work-related relocation, you could keep your home and consider using it as a rental property instead. Why is staying put attractive? Like many other things in the world today, home values are cyclical. Areas that may be experiencing a slow economic state of affairs today will likely pick up and, provided the home is in a stable state of repair, improve in value in time. If there is no critical reason to leave your home, consider remaining in your home until the market corrects itself and home values improve. You may even consider making improvements to your home during this time that will help to increase its value once you decide to put it on the market.

Selling Your Home

For some people, the only option is to sell your home. For example, you may be facing a relocation and need to get out of the financial obligation your home represents. Alternatively, you could be at risk of foreclosure and trying to salvage your credit. Some options are available that may allow you to sell your home even if it is underwater. However, they are not guaranteed and may come at a higher price than you want to pay. While none of these are entirely attractive options, they are options to consider and maybe the best option for you, depending on your tax and property situation.

Foreclosure

Sometimes foreclosure becomes the only option available to you. When this occurs, the lender retakes control of your home, and you get evicted. This process can take a huge emotional toll on you and your family, as well as a financial toll on your credit situation for the next seven years. In addition, the foreclosure process allows the lender to sell your home as quickly as possible to another buyer to help recover their losses. If you can avoid this process, it is best to do so from an emotional perspective. However, it is sometimes an economic necessity.

Declaring Bankruptcy

Bankruptcy is another option to consider when facing an underwater home. There are two types of bankruptcy you may qualify for in this situation: Bankruptcy has a lasting effect on your credit score and can be an exhausting process both mentally and emotionally, not to mention expensive. It’s not easy knowing the right move to make when dealing with an underwater mortgage, but understanding your options helps.

Selling a Home That is Financially Underwater

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The main attraction of a certificate of deposit (CD) is its fixed interest rate. Opening a CD in a bank or credit union allows you to lock in an interest rate that remains the same throughout the CD’s complete term, which can be months or years. Standard CDs focus on locking in that interest rate for the term of the CD. However, bump-up and step-up CDs are a new option in which the interest rate increases over time, following the changes in the market.

What are Bump-Up and Step-Up CDs?

Bump-up and step-up CDs allow for increases in the interest rate during the CD’s term. Bump-up CDs allow you to choose when you get a boost, while the bank or credit union chooses the increase in advance for a step-up CD.

Bump-up CDs

Unlike a traditional CD’s fixed interest rate, a bump-up CD will allow a one-time increase in the interest rate, which will lock in until the maturity period ends. A CD with a more extended maturity period, like four years, may allow a second increase in its interest rate. Bump-up CDs require the deposit holder to request the rate adjustment. For instance, a bank or credit union can offer a CD with a 24-month term and one bump-up option. For example, if the current interest rate is 2 percent and will increase to 2.9 percent in seven months. The seventh month will allow you to bump your interest rate to 2.9 percent to get increased returns for the remaining 17 months. Whenever the rates decline again, you’ll be able to enjoy the higher interest rate throughout the remainder of the maturity period.

Step-up CDs

Step-up CDs have interest rates that increase in phases over the maturity period. For example, your certificate of deposit can have an interest rate of 0.5 percent and have a schedule to increase it by 0.1 percent every six months for four years. That way, you’ll have a CD with a 1.1 percent by the end of its maturity period.

Advantages and Disadvantages of Bump-Up CDs

Advantages of Bump-up CDs:

Disadvantages of Bump-up CDs:

Advantages and Disadvantages of Step-Up CDs

Advantages of Step-up CDs:

Disadvantages of Step-up CDs:

Takeaway

In a growing market, a traditional CD with a fixed interest will make you lose out on any potential increase in interest rates. In contrast, getting a bump-up or step-up CD will allow you to increase your interest rate and get better returns after the CD’s maturity period.

Bump-Up CDs vs. Step-Up CDs

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ETFs, or exchange-traded funds, are an excellent way of investing in the securities markets. ETFs include a basket of securities to trade on the stock exchange, like mutual funds. They are simple to understand and can generate significant returns at a minimal expense.

What is an ETF?

Exchange-traded funds, or ETFs, are pooled investment securities traded on a stock exchange. An investor can buy a portion or shares of an ETF, and the fund fulfills the ETF’s objective. Like stocks, investors trade ETFs on major stock exchanges, like NASDAQ and NYSE. In addition, ETFs can contain all types of investments, like stocks, bonds, and commodities. Moreover, they can offer domestic or international shares.

Types of ETFs

Here are some of the types of ETFs currently available on the market.

Understanding Risks and Returns

An ETF is a marketable security that you can buy and sell daily. Whenever an investor purchases shares in an ETF, they’ll have fewer risks as the investment spreads over a collection of stocks. To improve returns and minimize risks, investors must consider the following while investing in ETFs:

Benefits and Limitations

Investing in ETFs can have the following benefits and limitations:

Benefits:

Limitations:

Takeaway

ETFs allow you to diversify your investments without having to purchase individual stocks. However, they may come with higher costs and potentially lower dividends than high-yielding stocks.

Investing in ETFs (Exchange-Traded Funds)

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Most people know that you need to save money for retirement. However, how many people know how much money they need to save? Do you? According to the 2022 Retirement Confidence Survey from EBRI, three in four workers, or 74 percent, are feeling very or somewhat confident about affording their expenses in retirement, with 29 percent feeling very confident. With the pandemic’s effects slowly fading, debt has become one of the key reasons as to why workers are feeling less confident about having funds during retirement. Roughly 56 percent of workers claim debt as being a problem. However, the pandemic and inflation has still affected workers’ confidence, especially those that lost work hours, income, or had job changes. For example, a third of workers have felt the impact of the pandemic, which has made them less confident in having enough for retirement. Determining how much you will need for retirement is one of the essential questions you can ask. Unfortunately, it is not an easy one to answer. That is because every retiree has different lifestyle plans for their retirement. Some want to spend their retirement years taking cruises and traveling the globe. Others want to spend their time taking their grandchildren miniature golfing. One of these options costs more than the other. Once you have determined what kind of lifestyle you would like to live following retirement, you can work toward saving the amount of money you will need. Again, how do you calculate that figure? You have several options.

Calculating Your Needed Savings

The advice from financial and retirement experts can be frightening to those planning for their retirement. There are even various advisory ‘rules of thumb’ that workers should consider as they contemplate their retirement needs. Some focus on your income, others your anticipated expenses, and a third on just reaching savings targets.

The Income Method

This method has a critical assumption: you will need a certain percentage of your ending income when you retire. Insurance company StateFarm estimates that retirees will typically need 70 to 80 percent of their pre-retirement annual income to maintain their standard of living during their retirement years. For example, the insurer says, a couple earning an average of $60,000 a year would need between $42,000 to $48,000 a year during their retirement. Once you know what you will need on an annual basis, you will then want to subtract what you can expect from Social Security, pension benefits, or any other continued streams of income you will receive post-retirement. The remainder is what you will need to withdraw from your nest egg each year. So if the same couple also receives $15,000 a year in Social Security and pension income, they will need just $27,000 to $33,000 from their nest egg each year. Most experts say that you should only plan on withdrawing 4 percent of your nest egg each year so that it lasts you through retirement. If we take our example couple and divide their remaining annual need by 4 percent (or 0.04), we can see that they will need between $675,000 and $825,000 in savings before they retire.

The Expenses Method

While the income method takes a top-down approach to determining your retirement needs, the expense method looks at the problem from the bottom up. To start, begin adding up all expenses you expect to have each month or year in retirement. If you take preemptive steps and begin eliminating credit card debt and mortgage payments, you will begin retirement working from a much smaller expense base. Once you know your budget requirements, follow the same steps from the income method. First, deduct Social Security, pension, and other income to arrive at your annual number. Then divide the remaining yearly amount by 4 percent (or 0.04) to get your nest egg number.

The Savings Method

The savings method does not require you to estimate your retirement needs. It just requires you to put aside a set percentage of your annual gross income each year towards your retirement. Most experts suggest that the minimum savings rate is 10%. Others suggest a more robust 20% savings rate. If you start saving early enough, you might be able to get by saving only 10% annually. Even a 20% savings rate may not be aggressive enough if you start later in life. One significant benefit of this approach is that the higher the percentage of income that you save, the less you will spend. That will reduce your expense levels through your earnings years and likely mean that you will start retirement with much lower budget requirements.

Points to Consider

In addition to maximizing your savings, there are several other factors to consider as retirement approaches. First, you have to determine the right age to retire. That will often depend upon your health and your industry, but, in general, the longer you can work, the better off financially you will be in retirement. Don’t retire early, or your monthly Social Security benefits will fall. If you push retirement off, the amount of your benefits will rise for every extra year of work you log. That can prove crucial depending on how long you live in retirement. Your health is also an essential factor in determining the amount of money you need for a satisfying retirement. Health care is not inexpensive, even when you factor in Medicare. If you already have health problems before retirement, you can expect to spend a significant amount of out-of-pocket money on healthcare once you are no longer working. Consider your retirement goals, too. You might want to live a life of luxury after you stop working. That might not be possible if you have not saved enough money. In such a case, you might have to scale back your plans to cruise the world’s oceans and instead be content with taking day trips to state parks. Luxuries are not as necessary as paying the bills and living comfortably. Finally, take a look at your skills. Just because you have retired from one company does not mean that you cannot still earn money. For example, you can work on a part-time basis as a consultant. You could start a home-based business with your spouse. You might even run a side business with one of your children. Such outside work can keep you connected to your industry while also giving you more hours to relax with your grandchildren or spouse. Retirement planning is far from an easy task today. However, those workers who know how much money they need during their retirement years can take the steps necessary to boost the odds that their retirement years will be pleasant ones. Once you know the financial realities of your retirement, there is nothing to stop you from saving the money you need to make your retirement goals come true.

How Much Do You Need to Retire?

View Resource How Much Do You Need to Retire?
Diversification is an investment strategy that combines a wide variety of investments in a portfolio to reduce risks associated with investing. By combining different kinds of assets in a portfolio, an investor can limit exposure to the risks associated with investing in a single asset.

Understanding Investment Diversification

When an investor gets different types of assets and investment vehicles in their portfolio, the diversification process smoothens any risks from a single security. The positive performances of some securities will balance out the negative performance of others, reducing the overall risk of investments.

Types of Investments

Investors building a diversified portfolio can invest in various stocks and securities, like the following:

Asset Classes

You can invest in various asset classes:

Industries and Sectors

You can diversify your portfolio by investing in stocks and bonds of companies in different industries and sectors like energy, healthcare, and technology. Growth in one sector can fuel its share prices, balancing a fall in other industries while diversifying the investor’s portfolio.

Domestic and Foreign Countries

Diversification is also possible by investing in domestic and international shares. In addition, investing in different global markets can diversify portfolios.

Diversification Strategies

To effectively diversify a portfolio, investors need to have a balanced mix of different types of securities that are not perfectly co-related; that is, they respond differently to changes in market conditions. Investors can diversify their portfolios by investing in different types of shares following the strategies mentioned below.

Asset Classes

Investors often diversify portfolios based on the different asset classes.

Stocks and Bonds

Stocks and bonds represent two leading asset classes. Therefore, one strategy to diversify a portfolio is determining the proportion of investment between stocks and bonds. Although stocks often offer higher returns, they tend to be riskier than bonds. In contrast, bonds offer a secure way of investing with lower returns.

Bond Assets Classes

Bonds can be classified based on the following:

Alternative Assets

Alternative assets, like real estate, cryptocurrencies, and commodities, do not fit into the stock and bonds asset classes. Therefore, investing in them can further diversify the investor’s portfolio.

Industries and Sectors

Investors can diversify their portfolios by investing in different industries and sectors. For example, investing in unrelated industries like airlines and digital streaming can help hedge the risks of investing in a particular industry or sector.

Geographical Locations (Domestic vs. Foreign)

Investing in foreign securities can help investors diversify their investments. Geographical locations typically classify as U.S. companies, companies in developed countries, and those in emerging markets. Investors looking to benefit from higher growth potential and high risks can invest in emerging markets.

Market Capitalizations (Big vs. Small)

Another way investors can diversify is by purchasing shares in companies that differ in the market capitalization of their assets. Companies have a unique way of asset acquisition, brand recognition, and other operations based on their market size. While large capital stocks are considered safe investments, small caps have more significant growth potential.

Company Lifecycle (Growth vs. Value)

Public equity shares can classify into growth and value shares. By investing in a balanced way between the two shares, an investor can further diversify their portfolio.

Benefits and Limitations

Investment diversification does have its advantages and drawbacks.

Benefits

One of the most significant benefits of diversification is reducing your risk. If one asset class isn’t performing well, another asset class can make up for it. In addition, it can help you achieve your long-term financial goals by mitigating risk.

Limitations

Diversification can limit some downsides by averaging volatility and risk across a group of investments. However, it can shorten your upside, causing you to realize lower rewards. As you further diversify your portfolio, your returns may mimic the market average. A highly diversified portfolio can be time-consuming if you’re doing it alone.

Takeaway

Investment diversification is an essential strategy in financial and investment planning and management. Instead of putting all your money in a single asset, maintaining a diverse pool of assets can balance your risks while ensuring an optimum return on investments.

Diversifying While Investing

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