Find a good financial planner to help you generate investing ideas. (Photo Credit: CC BY-ND/Brook Rushing/Creative Loafing)

People invest because they want to create wealth. Day traders may savor the adrenaline rush, but profit is the purpose. In order to invest effectively, however, it pays to know some basics. It also pays to know how not to invest.

Invest in a 401(k)

Experts advise getting started with a 401(k) plan from your place of employment, preferably with matching funds from the company. The money deposited is not taxable as long as it remains in the account, earning dividends, interest and capital gains. Let it sit for a while and gain interest for your retirement.

About.com reminds investors that a 401(k) is not an investment per se but an account that holds investments in stocks, bonds, mutual funds and more, depending upon your 401(k) variant.

Save for a rainy day

In addition to a retirement account, it is essential to establish savings. Online resources like Motley Fool or any worthwhile financial adviser can help you decide how much you should realistically be saving.

Max out your Roth or Traditional IRA

A Roth IRA retirement account gives you the flexibility to make contributions after taxes, so taxes are paid only upon withdrawal. Maxing out your contribution limits will enable you to build a fine nest egg. Even if you don’t qualify for a Roth, a Traditional IRA still grants you sizable tax benefits.

Expanding beyond the retirement account

Producing additional wealth can mean opening a brokerage account and buying stocks. Before investing, however, you should have a clear vision of your goal. Know what you want and how long it will take you to get there based upon the amount of the investment and rate of return.

Pay off your credit cards first

The interest rate on credit cards make them the worst debt consumers can hold. Take care of all credit card debt before beginning to invest in stocks.

How NOT to invest: Don’t sit on your hands

Motley Fool points out that stock market is unpredictable, but t if you venture nothing, you will gain nothing. The miracle of compound interest smiles upon those who buy in. If you invest in stocks and stop paying attention, you’re asking the market to swallow your cash. Follow your stocks and move on if and when the time is right. Remember your financial goals and don’t go too far outside your comfort zone unless you’re prepared for possible loss.

In and out is expensive

If you’re investing through a brokerage firm, frequent trading in and out of the market will produce major fees. Day traders make up for this in volume, but for the basic investor, long-term investments (ideally five years or longer) are the safer course. If short-term investment is necessary, consider money market funds or CDs, advises Motley Fool.

Sources

About.com

Motley Fool

From socks to stocks

Current market conditions are making dividend-paying stocks a cheap long-term investment, but the end of Bush tax cuts could spoil the party. Image: Thinkstock

Investors are shopping for dividend-paying stocks in an unusual market environment. Record-low interest rates make putting money in bank accounts illogical. Despite a sputtering economic recovery, companies sitting on huge piles of cash can afford generous dividend payouts. The number of companies paying more in dividends than the average bond yield is at a 15-year high. The dividend tax rate is low. Dividend-paying stocks can provide a revenue stream and serve as a hedge against inflation. But if the Bush tax cuts expire, the value of dividend-paying stocks could sharply drop.

Dividend-paying stocks are hot right now

Dividend-paying stocks are hot right now because of several factors. Historically, bond yields far outstrip that of stock dividends. But more U.S. stocks are paying more than bonds than at any time in at least 15 years, according to Bloomberg. Companies raised payouts by 6.8 percent in the second quarter. Increasing worker productivity during the downturn has made companies cash-rich. Dividend-paying stocks are cheap, thanks to record-low interest rates, a projected growth in profits of 36 percent in 2010 — the fastest pace in two decades — and a slowing economy. A 10 percent drop in the S&P 500 since April also pushed up dividend yields relative to share price. It’s giving investors the opportunity to buy stocks that pay more than bonds, at inexpensive price-to-earnings multiples.

Why dividend-paying stocks are popular

Investors see stock dividends as a safety net in a recession and a hedge against inflation during a recovery as well, according to Linda Stern at ABC News. During a recession, if stock prices go down and bonds lose value, investors can always cash a dividend check. During an economic recovery, if inflation kicks in, dividends can follow suit. However, dividend-paying stocks carry risk. Stern uses Bank of America and Citicorp stocks, which saw generous dividends disappear during the credit crunch, as an example. Plus, if the Bush tax cuts are allowed to expire on Dec. 31, dividends could again be taxed like ordinary income — at rates as high as 39.6 percent. Currently the dividend tax rate is  15 percent — the same as capital gains.

How to pick dividend-paying stocks

Now is the time to look at dividend-paying stocks as a long-term investment, according to Matt Theal at MarketWatch. Theal said investors should look for companies that pay dividends higher than the return in the credit markets. Currently 68 companies in the S&P 500 yield more than 3.78 percent, the average rate in the credit markets since 1995. Theal used a stock-screener to search for S&P 500 companies paying a dividends yield of 3.78 percent that sell under 12 times earnings. The screen returned 25 companies, including Bristol-Myers, Excelon Corp., Reynolds American Inc. and Verizon Communications Inc.

The Certificate of Deposit

There are many other saving tools around with much higher interest rates and fewer time restrictions. Still, CDs manage to be a viable option for saving because of their nature. Anyone can invest with them because the only real restrictions are time and the amount. CDs normally take a specific amount of cash that’s placed into the account and accrues interest over the length of the investment. Three, six and nine-month long CDs are the most common but there are also longer-lasting CDs that offer higher interest rates of return. Though those rates are “higher,” they are still only an average 2.91% on a 5-year CD, with shorter-term investments capping out at around 0.9%.

Low interest CDs

The lowest rate CDs, or short-term ones, are the ones currently being scrutinized. According to a recent Bankrate.com survey, people who are ridding themselves of their low-interest rate CDs are paying a lot more than they originally bargained for. In fact, most financial institutions today hike up the cost of early withdrawal penalties. Of the financial institutions surveyed, 92% of them not only charge an early-termination fee, but also take costs out of the principle to cover any additional fees they need to cover.

How the fees add up

The Bankrate.com survey showed some interesting facts on financial institutions and CDs that are withdrawn early. Research shows that the withdrawal penalty for a CD is normally equal to about six months’ worth of interest. That number isn’t consistent though, and investors are warned to be aware of how their money is going to be allocated if they withdraw it prematurely. For example, Presidential FSB bank in Washington, D.C. has a return of 2.5%. If a consumer withdraws it early he or she can expect to pay 24-month’s worth of interest in penalty charges. If their CD is valued at over $10,000, then the penalty for early withdrawal is $506.25. For consumers who are trying to make the most of their quick cash by investing it, the early withdrawal costs of a CD may thwart their plan.

Think about investments long-term

Some CD investors of the past signed up their money for longer periods of time to take advantage of the higher interest rate return. This used to be a good idea, but now that financial institutions are shoring up their rules and regulations for the sake of bigger returns, it isn’t as useful an option as it once was. In particular investors who know they will need money sooner may find the technique of signing up for a higher-interest CD counterproductive.

According to financial experts, however, there is a solution. Investors should stop looking at the bigger return of long-term CDs and opt for CDs with a more realistic length. Accounts with more favorable maturity dates come with lower interest, but investors can then reinvest them once they come due. The added benefit is that the market is on the upswing, so that means insurance rates will be going up, too.

Investing money post-recession

Banks are harder on investors these days. After weathering the recession, financial institutions are making their rules more difficult to cut back on losses. Despite changes, though, there are still ways to manage. Consumers need to assess their individual needs and then choose the right savings vehicle accordingly. CDs are still viable savings tools, but need to be maneuvered wisely to maximize fast cash for the future.

Need quick cash? Apply HERE!

Consumers are lacking quick cash options now that lenders are working with stricter rules. Prior to the recession, lenders were handing out loans to sub-prime borrowers. There were few restrictions and the loan products available were vast. Almost every applicant could find some loan company to provide the credit needed. Unfortunately, though it put many Americans into homes, it did little to assure that they had the ability to repay the funds. That’s what caused the lending crash and partially fueled the recession of 2008/2009.

The change in consumers

The hard choice that many Americans are being forced to make is whether to pay their credit card bills or their mortgages. It may sound unfathomable and a few years ago, it was. But in today’s tough financial times there are a growing number of consumers who are opting to pay down debt on credit cards. According to a TransUnion study, the percentage of Americans who are current on credit card payments but behind on their mortgages is increasing. In fact, it increased to 6.6% at the end of 2009 and that is up from just 4.3% at the beginning of the year. For those who are current on mortgages and late on credit cards, the data is opposite. At the end of last year that rate was at 3.6%, which is up from 4.1% one year prior.

What the numbers mean

The change in numbers is telling of where consumers are now that they have been through a recession. There was a time when the common perception was that any homeowner would do whatever it took to pay a monthly mortgage payment, even falling back on other bills as a result. Today’s homeowner isn’t following the same model. Experts are attributing the shift to home values. When the housing market bubble burst at the beginning of the recession, borrowers watched their home’s value decline. Some declined up to 40%, and that left them with “underwater” mortgages.

An underwater mortgage is a condition where the borrower owes more than their home is worth. Knowing they were underwater left many consumers with changing priorities. They believe that if they owe more than the home is worth, it may not be as important to make a mortgage payment on time. Rather, they use their quick cash to pay down debt. A study done by RealtyTrac showed that in today’s market, about 25% of homeowners are in the underwater position with their mortgages. The common feeling is what is the purpose of putting money into an asset that is just losing value—value that it most likely will never regain?

The lending bubble’s aftereffect

Another problem the lending crash created was a market that isn’t personally invested in their property. In former years, consumers had to put 10 to 20% down on a property. It helped to psychologically bond them to the property because of their upfront investment. During the lending spurt, consumers were allowed to buy properties with little to nothing down. That meant that there is no personal investment. Add to that the huge number of foreclosures and the loss of property just isn’t as scary sounding as it once was.

In lieu of the long-term investment

More and more consumers are joining the ranks of those prioritizing paying off credit cards, rather than mortgage payments. The reason can be attributed to a huge paradigm shift in the market since the recession. Consumers want quick cash options and credit cards offer that, not homes. Americans seem more focused on having ways to afford everyday expenses like food, gas and clothes than on long-term commitments.

Need quick cash? Apply HERE!

As long as they're OK, consider installment loans for your business's short-term financial needs. (Photo: flickr.com)

Small businesses are looking to installment loans rather than stocks for funding options. Before the recession, many small businesses were investing in the stock market, trading for added revenues. Dallas-area financial planner Chance Woods stated his clients have a “mixed feeling of relief at stock gains since March, and are reluctant to fully commit to the market.” Research is showing that most small business owners are feeling the same hesitation. The financial hit many of them took due to last years’ recession is having a huge effect on their confidence to move towards stock investing again.

Woods added, “People have been on an emotional roller coaster over the last two years, so they’re not quite ready to say, ‘I’m all in’…it’s going to take some time for them to recover and a lot less market volatility than we’ve seen.”

Alternative Investing

Although alternatives to stocks like money-markets and savings accounts were popular, it seems now that the return on investment is so low, business owners are hesitant there, too. According to Bankrate.com, the current rates for both modes of investments average about 1.5 percent around the country.  Seeing the lackluster interest rate, many business owners are opting for immediate installment loan options rather than wait out slow and minimal returns of other investing vehicles.

A Case in Point

Donnie Griffin, owner of a management consulting firm in Palm Springs, California, invested his money wisely. However, when the recession hit hard, he sold a good portion of his $250,000 portfolio. One week later, the stocks saw their biggest gain throughout the recession period. Griffin agreed he had “unfortunate timing” in his decision, but he also said that he wouldn’t venture back into the stock investing market easily. “Once you make a decision I think you’ve got to just ride it out… having experienced this drop, I’m better experienced for the next time one comes around.”

Griffin is not alone. As a business owner, his sentiments are shared nationwide. Many people lost a lot of money in stocks during the down economy. Although Griffin is patient, a lot of others aren’t. They want a more solid way of guaranteed money. Installment loans for a lot of qualified small business owners are proving to be that option. These types of loans are quick and simple for the qualified applicant. They potentially can bring money in when small business owners need it most. Rather than wait out a long-term investment and then reap only a small to moderate return, business owners are more confident in alternative types of loans.

No Guarantees on the Market

The most difficult thing for investors is that there is never a guarantee of market growth. The market is volatile and may take another turn for the worse. Robert Haley of Advanced Wealth Management stated, “It’s a gamble to hold and not sell now, and it’s a gamble to go all-in.” He believes that the way to mitigate the gamble is to build a long-term portfolio, but not rely on it for immediate funding. His belief is that a portfolio is never for immediate (or even moderate-term) funding. A better option may be immediate installment loans, or assets that are quickly liquidated. These are the types of funds that small business owners should have readily available for times of trouble.