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Investing 101 – Part 3

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By Laurie Itkin
 

Welcome to Part 3 of Investing 101. In Part 1 of this series, I explained what investing is and why you should care. In Part 2 of this series, I explained the differences between stocks, bonds, mutual funds, and exchange-traded funds (ETFs). If you haven’t already read those two blog posts, I suggest you take a few minutes to do so before reading further.

 

Investing for Income or Growth

Is your goal for investing to generate monthly income to use for current living expenses or is it for long-term growth of your principal? Many investors like to do one or both depending on where they are in their lives.

 

I have worked with couples who together own a real estate property which they rent out for income. In the divorce, each spouse wants to keep the property because it generates income. However, sometimes the net income is paltry after subtracting monthly and annual expenses such as mortgage and property tax payments and cash outlays for repairs. Regardless of the level of net rental income, there is a good chance the property will increase in value over time. This is an example of a “growth and income” strategy.

Sell Inherited Jewelry With Trust

Sell Inherited Jewelry With Trust

Covered Calls: The Stock Market Equivalent of Renting Out Property You Own

Rental real estate never appealed to me because I don’t want to deal with tenants, toilets, or trash. I prefer generating monthly income through a covered call strategy, which is the stock market equivalent of renting out property you own. In this investment strategy, you purchase shares of stock and sell call options against the stock you own. You can generate quarterly dividend income and monthly option premium. The income generated provides some cushion against loss when stock prices go down just like rental income provides some cushion against loss when housing prices go down.

 
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I prefer generating monthly income through a covered call strategy, which is the stock market equivalent of renting out property you own.

 
 

In a divorce settlement, if one spouse keeps the real estate and the rental income, the other can take a cash buyout and generate income by investing in covered calls and/or other income-producing securities. I teach the covered call strategy in Chapter 6 of my book, Every Woman Should Know Her Options. Covered calls can also be used in an Individual Retirement Account (IRA) if the account holder desires a less risky strategy than investing in 100% stocks.

 

Deciding Which Type of Investment or Retirement Account to Open

Retirement accounts are great places to invest for growth because you don’t take out income until you retire and money compounds either tax-deferred or tax-free (in the case of a Roth IRA).

 

If your employer offers a retirement plan, such as a 401(k), 403(b), or Thrift Savings Plan (TSP), that’s a good place to start investing, especially if your employer matches part of your contributions. Don’t pass up free money! Once you start participating, your contributions are made automatically from your paycheck. Some employers also offer a Roth 401(k). Your current federal and state income tax brackets will be factors in deciding between the traditional and Roth 401(k). Most employer-provided retirement plans offer a selection of mutual funds in which to invest.

 
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If you are self-employed, there are a variety of retirement accounts you can establish, with my favorite being the SEP IRA due to its ease of setup. This is a convenient way to lower your taxable income which translates into paying less tax. With IRAs, you are not limited to mutual funds and have a universe of securities from which to choose.

 

I often recommend a Roth IRA for women in low tax brackets or those who think they may need to access some of their funds before retirement age. I also recommend the Spousal IRA for stay-at-home moms who are married.

 

How to Get Started

The maximum annual contribution for a Traditional, Roth or Spousal IRA is $5,500 ($6,500 if you are over 50). If you already have money in the bank for emergencies, make 2018 the year you fully fund an IRA (assuming you qualify). If you were to invest $5,500 a year in an IRA for 20 years, depending on how conservatively or aggressively you invested it, you could end up with between $150,000 and $250,000. Make it an annual habit to contribute to a workplace retirement plan, an IRA, or both.

 

If you want an investment account that is not tied to retirement, you can open a brokerage account. Just be aware that you may have to pay taxes on your investment earnings each year.

What to do with your engagement ring after divorce
What to do with your engagement ring after divorce

There are many financial institutions that offer brokerage accounts and IRAs with no setup fees. Find this overwhelming and need some one-on-one coaching to get started? Try my Financial Empowerment package.

 
Disclaimer: The information contained herein is strictly for educational, informational, and illustrative purposes, and should not be considered personalized investment advice.
 
About the Author

Laurie Itkin is a financial advisor, certified divorce financial analyst (CDFA), and the author of the Amazon bestseller, Every Woman Should Know Her Options. For less than the cost of a one-hour meeting with an attorney, her online course, The Recently-Divorced Woman’s Guide to Financial Independence, teaches separated and divorced women essential financial concepts. You can request a free consultation or subscribe to Laurie’s newsletter by visiting TheOptionsLady.com.

 

In the last part of the Investing 101 Series, Laurie Itkin explains how to invest for income versus growth, and how to start investing today.
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