Basics of Investing: Concepts

These days it's more important than ever to make smart investment decisions. But understanding how investments work, and the forces that affect investment performance, can seem so complicated it may prevent you from starting an investment program.

You may even be asking yourself: Why should I consider investments instead of just depositing my money in a bank savings account or certificate of deposit? The answer: Because savings accounts are particularly vulnerable to the "silent thieves" (inflation and taxes) that impact your ability to save for your long-term financial security.

• Inflation
  Although the United States has experienced relatively low inflation over the past several years, a gradual increase in the cost of goods and services can erode your purchasing power over time. Today's dollar simply won't buy the same goods and services in the future.
  
  For example, at an inflation rate of 4% per year, your income would have to more than double every 20 years just to maintain your present standard of living. The higher the inflation rate, the more you'll need to consider alternative ways to make your money grow.
  
  

• Taxes
  No one likes to pay taxes — especially when you work so hard for your money. Taxes essentially reduce the rate of return on your investments. The higher your tax bracket or the higher the inflation rate, the greater the impact on your real rate of return and the more you'll need to consider tax-free or tax-deferred investment alternatives.

• Compounding
  When it comes to investing, time can be your ally. That's because the longer you invest, the longer your money has to grow and compound. The power of compounding is the single most important reason for starting to invest right now.
  
  Here's how it works: The earlier your investments begin to compound, the easier it is to reach your goals:
  
  

The chart is for illustration purposes only and should not be considered a projection of potential returns on any particular investment. All withdrawals are subject to federal income tax in the year they are withdrawn. A penalty tax may be imposed for early withdrawals.

• Dollar-Cost-Averaging
  Dollar-cost-averaging can help boost your purchasing power. Each month (or pay period), you contribute a specific but equal dollar amount to your investment program to purchase mutual fund shares. As market prices fluctuate, you will end up buying more shares when prices are lower and less when they are higher, in essence, effectively lowering your overall cost of shares.
  
  

• Tax-Deferred Investments
  Compounding can help grow your money faster and dollar-cost-averaging can help lower the cost of investing, but taxes will still take a big chunk out of your total return.
  
  If you qualify, you can lessen that tax bite by investing in a tax-deferred retirement account such as a 401(k), 403 (b) or 457(b) plan, as well as Traditional IRAs and Roth IRAs. Depending on your personal situation, these retirement accounts may reduce your taxable earnings and the income tax due on those earnings, as well. In all cases, the contributions you make to these plans — and their earnings — grow and compound tax deferred until you make withdrawals upon your retirement.
  
  Here's how tax deferral can help increase your savings:
  
  

A plan of regular investing does not assure a profit or protect against loss in a declining market. You should consider your financial ability to continue your purchase through periods of fluctuating price levels.

Dearborn & Creggs Can Help

You work hard for your money. Why not let your money work for you? Every day your dollars are invested is a day your money is working to help build towards a more financially secure future. Yet choosing among the various investment options available can be a complicated, time-consuming endeavor.

Your Dearborn & Creggs financial representative can provide valuable assistance in helping you make well-informed investment decisions about the investment products and services most appropriate for your situation and needs.