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Investing Hierarchy: A Step-by-Step Guide

Do you ever wonder how you should approach your investment allocation? Which investments should you have as part of your wealth-building portfolio?

When it comes to investing, there is no one-size-fits-all approach. The best way to invest will vary depending on your individual circumstances, goals, and risk tolerance. However, there is a general investing hierarchy that can help you get started.

The first step in the investing hierarchy is to build a foundation of emergency savings. This will help you protect yourself from financial hardship in the event of an unexpected job loss, medical emergency, or other unforeseen event. Ideally you would have at least three to six months of living expenses saved up, then you can start to think about investing for longer-term goals, such as retirement or a child's education. However at a minimum, you should try to have at least $1,000 saved to handle those unexpected emergencies.

The next step is to consider protected investments. These are investments that are less risky than other options, but they also offer lower potential returns. Protected investments include FDIC-insured savings accounts, CDs, and money market funds. Right now, online high-yield savings accounts offer very attractive interest rates ranging from 4% to more than 5% with the security of FDIC insurance to protect your investment.

Once you have a solid foundation of emergency savings and protected investments, you can start to consider investing in equities that include mutual funds, ETFs and individual stocks. ETFs are baskets of stocks that trade on stock exchanges like individual stocks. They offer diversification and lower costs than individual stocks, making them a good option for investors who are new to the market. Individual stocks can offer higher potential returns than ETFs, but they are also riskier. There are many great low-cost ETF options from Fidelity and Vanguard that should be considered for your portfolio.

The last considerations for the investing hierarchy are higher-risk investments, such as options, futures, and commodities. Paycheck to Wealth avoids and does not recommend these types of investments for the beginner investor. These investments can offer high potential returns, but they are also very risky. If you are not comfortable with a high level of risk, you should avoid these types of investments.

If you have an employer offered investing program, then the top of the hierarchy will have Health Savings Accounts or HSAs as the best investment option. This is because HSAs have triple tax savings advantages. First, HSAs are funded with tax exempt dollars. Second, the investments grow tax free. Finally, the account is used to pay for health-related expenses by using tax free withdrawals. This is very hard to beat. Paycheck to Wealth highly recommends using HSA accounts if you have this option available to you. An additional bonus is that your employer usually has a company match for a portion of your contribution to your HSA account. This is free money of which you should take advantage.

The investing hierarchy is a helpful tool for investors of all levels of experience. By following this guide, you can build a diversified portfolio that meets your individual needs and goals.

Here are some additional tips for investing:

  • Start investing early. The earlier you start investing, the more time your money has to grow. Also invest regularly. Even if you can only invest a small amount each month, it will add up over time.

  • Do your research. Before you invest in anything, it is important to do your research and understand the risks involved.

  • Diversify your portfolio. Don't put all of your eggs in one basket. By diversifying your portfolio, you can reduce your risk.

  • Rebalance your portfolio regularly. As your investments grow, you will need to rebalance your portfolio to ensure that it still meets your needs and goals.

  • Stay disciplined. Investing is a long-term game. Don't get discouraged by short-term fluctuations in the market. Stay disciplined and focus on your long-term goals.

It's important to note that this is just a general guide. Your individual circumstances may vary, so it's important to speak with a financial advisor to create an investment plan that's right for you. Please contact Paycheck to Wealth for a free review and to learn more.

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