Have you ever wondered if you should be investing in something other than your 401k? Let me just give it to you straight – you should. Your 401k is a great investment tool (especially if your employer matches your investment), but it should not be the end all be all for your investments.
At first, I paid off my student loans, and then my credit card debt, and then I tackled the home loan (which I am still working on today, but it shouldn’t take much longer). At this point, I am starting to think, “Ok…what’s next?” I mean, it’s easy to focus on paying off debt. You just decide what you’re going to pay down and then throw your savings at it for a while. Easy peasy.
BUT, what about investing??
What if all of your debts were paid and you had additional savings dollars to invest? Is it really wise to put more money into your 401k? Or, maybe it’s just time to enjoy the fruits of your labor and buy some nice stuff (boats, cars, etc.). Or, maybe you could go the complete opposite route and save up to retire early. But hmmm, wait a minute. If you put additional money into your 401k, then how can you really retire early? If you retire before the age of 59, then you will not only be taxed on your withdrawal, but you’ll also be penalized! This is exactly why I do not max out my 401k each year.
Reasons for Investing Outside of Your 401k
Some people decide that they would rather invest outside of their 401k (myself included). So what are their typical reasons for this?
- Don’t want to get penalized for early retirement
- Want to further diversify their money
- Want more control over their money
- Investing outside of the 401k will make them more aware of their gains and losses
There are some downsides to this method, however. The main one relates to taxes. By investing in a 401k or a Roth IRA, you will only get taxed once on your invested dollars. If you invest on your own after the taxes have been taken out of your paycheck, and then you earn additional money with your earned income, then you will also pay capital gains tax. So, this route does mean that your financial mountain may be a little steeper, but I believe that the financial control that you will have more than makes up for this downfall.
Other Areas of Investing Besides Your 401k
Off the top of my head, here are some other great investment options outside of your 401k:
- Start your own business – This doesn’t have to be big, just start a small service company (mowing lawns, washing windows, tutoring children, etc.) for less than $1,000 and turn it into a nice side income each year. Once your clientele grows, you can start hiring others to do the work for you, but still earn a nice revenue.
- Annuities – This is pretty simple. For an annuity, you simply hand over a lump sum of money to an organization, and they will agree to pay the money back in monthly installments, with interest. Many times, the interest rates are quite low, but it is a definitely possibility for another investment option, especially if you like getting paid regularly.
- Real Estate – This is where I plan to put a large portion of my money. I want to buy single family homes and rent them out to responsible tenants ( hopefully!) for a monthly profit. It takes a bit of money to start, but once you get rolling the income can really add up.
- Small Start-ups – You might not be an “idea man”, but I bet you know someone that has an awesome idea for a new business – they just need some funding. It may be risky, but if you believe in that person and their idea then it could mean some pretty crazy wealth in your future.
- Land – This is a easy one. Find some land on the outskirts of a farmer’s property and ask them if they would rent the land if you bought it. If yes, just pay for the land and begin collecting the monthly payments from the farmer.
- Buy a Business – This could be a wide range of items. Maybe you are interested in buying a car wash or a quick lube place. These can be purchased for $250,000 or less and will provide a healthy income each month. Maybe there are some vending machines around town that you would like to own – this could be a possibility as well. This list could go on and on…
- CD’s/Money Market – These are typically pretty low returns, but if you want a safe investment that is fairly risk-free, this would be the place to do it.
- Credit Union Checking Accounts – If you have $15,000 in your savings account earning nothing, then perhaps you should transfer it over to a credit union. Many of them offer between 2-3% on your checking account balance. I personally earn $400 or more each year just because I have a decent amount of money in my account!
- Your Home – This will not bring money to your mailbox each month, but if you are good at fixing up homes then you might want to look for a fixer-upper, polish it up, live there for two years, and then sell it for a hefty profit. You won’t have to pay tax on the earnings and you could do this over and over again throughout your life.
- Education – An additional degree could earn you many more dollars of income each year. Over the course of your life, it would probably be well worth the investment!
Would you ever invest outside of your 401k account? Where would you put your money?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.