There are numerous other tax benefits related to investing. Many pertain to retirement accounts, but not all. There are also lower tax rates for the earnings on certain asset classes, most commonly stocks and real estate. These are known as long term capital gains, and they provide another incentive to invest instead of consume.
By saving and investing, it is possible to earn enough passive investment income to pay for all living expenses. Some might call that milestone financial freedom. At that point, you can choose to pursue whatever career, job, or hobby you desire. How’s that for motivation?
Primary Investment Options
As stated above, stocks are a good investment and have historically provided high returns for investors. Stocks represent actual ownership of a publicly traded company, and the stock owner (investor) is entitled to a share of company profits. So by investing in stocks, you are providing the money necessary for companies grow, expand, and create profits to eventually give back to you. The stock market has risen roughly 10% per year over the last century in this country, which means there are far more profitable months than bad months.
Stocks are not without risk. The stock market has plummeted many times throughout history, and it will almost surely do it again. Protecting against unlucky market events is called “hedging” and is a common practice among investors. The most widespread way of hedging is using negatively correlated assets and options. For example, if a company’s revenue and share price are strongly dependent on foreign trade and exchange rates, one can hedge the investment in stocks of said company by trading fx options based on the currencies involved.
Bonds are much different. They represent debt. A company issues bonds to raise money as well, but the bond represents outstanding debt that must be paid. So the investor lends money and purchases a bond, and the company is in debt to the investor. The company must pay the investor back at a set date, along with periodic interest payments to reward the investor for loaning the funds and accepting risk.
Bonds are less risky than stocks and have historically provided lower returns. Older individuals tend to favor bonds more than young investors because of the decreased risk and guaranteed income provided by the interest payments made by the issuing company. However, bond prices are inversely related to changes in interest rates. When interest rates rise, bond prices fall, and vice versa.
Real estate is another viable investment option. Historically, real estate prices have risen at about the same rate as inflation. Not great you say? Well most people make their money in long term rentals or fixing and flipping. With a little knowledge and hustle, real estate can provide excellent returns while offering some additional tax benefits for investors.
Why Do People Invest?
In summary, we invest to make more money. This is important to reach financial goals, maintain purchasing power, etc.
If you are looking to begin investing and need some guidance, consider reading my reviews on companies like Betterment and Wealthfront. Both of these firm will invest in stocks, bonds, and real estate for you in exchange for a minimal fee. They recommend advanced portfolios based on sound academic research, complete with tax-loss harvesting, and a number of other great features.
If you have any questions, just let me know.
This article was republished with permission from Cash Cow Couple.