One of the challenges of getting ahead financially is knowing what to ask. There's a phrase for this: "You don't know what you don't know." The more young investors can do to improve their financial literacy, the better they'll be able to look out for themselves. Let's go over some key financial terms and the questions to ask a financial advisor to help you get ahead.
Key Financial Terms Young Investors Should Know
Compound interest is earned on money you borrow and money you invest. When you invest money, you earn interest on the amount you invested. The interest goes back into the account, you earn interest on the money you've earned as interest. This is why starting to invest as young as possible can be so beneficial.
When you take out a loan, you have to pay the lender interest. With compound interest, you will pay interest on the accumulated interest of the loan. This is why paying off the loan as soon as possible can be best for your long-term financial goals.
Stocks are an investment option. When a stockholder buys a stock, they are buying a share of ownership in a company. If the company does well, the value of the stock goes up from when the holder originally purchased it. If it does poorly, the opposite happens.
Sometimes an employer offers stock options, particularly as incentives for their higher-up employees. This gives employees the right to buy the stock of their employer. This is usually available at a pre-set price and within an offered time period. This gives employees the incentive to make sure the company does well, thereby improving the value of the stock.
Bonds are a way that businesses can raise money. When young investors buy bonds, they are essentially loading the issuer of the bond money. Bonds are often offered by organizations like the government or major businesses. The purchaser of the bond earns money through interest on the bond.
Questions To Ask a Financial Advisor
Should I Invest in Stocks or Bonds?
Stocks have a higher risk, but they have a higher potential for return than bonds do. Over time, bonds can be less valuable, especially due to inflation. To answer the question, this is going to depend on factors like your time horizon, risk tolerance, and end goal. Are you saving for retirement or for a down payment on a house?
This is a great point to consult a financial advisor on since they'll be able to look at your individual needs and income. They'll then be able to tell you if stocks, bonds, mutual funds, or an alternate investment will help you best.
What Are My Tax Responsibilities With This Retirement Account?
Your tax responsibilities with a 401(k), traditional IRA, or Roth IRA are all different. With a 401(k), your contributions are taken from your income before taxes are removed. You'll pay taxes on the income when you make withdrawals. With a Roth IRA, the situation is the opposite.
Your current and future tax bracket estimations will be a factor in determining what is best for you. So will your options with your employer. Consult with a financial advisor to make smart decisions about what will work best to minimize your tax obligations and earn you the most on investments.
It takes a while to learn the financial terms you need to understand for long-term financial success. This is why consulting an expert financial advisor can be so useful. Reach out to Jaks Financial today for strategic financial planning customized to your needs.