Yes, you can teach your audience how to invest at almost zero risk
By Joe Pye
Day trading. Junk bonds. Cryptocurrency. There are a lot of ways to invest money and lose some — or even all — of it.
Then there’s safe investing that anyone can do. Yet many Americans don’t: high-yield savings accounts, 401(k)s, and mutual funds.
No one can time the market. But there’s also no better time than the present to start investing. Here are some simple and low-risk ways to teach your audience how to get started.
High-yield savings accounts
There’s no secret, groceries are more expensive now than a few years ago. Although inflation has cooled to around 3%, it was below 2% in 2019.
This isn’t the first inflationary period in U.S. history — and there is a formula to combat inflation: compound interest. You deposit money into a savings account that pays a set interest if the money sits for a set time. If you add more money for more time, the account will “compound” — meaning it will pay interest on both your initial (principal) investment and the earned interest.
Let’s say you invest $1,000 in an account that earns 4% (APY), you’ll have $1,040 at the end of the year.
Now let’s say you’ve budgeted to add $1,000 more next year. You’ll then have $2,040 as principal. But the 4% (APY) pays again on the higher principal, adding up to $2,121 after another year.
Banks and credit unions offer financial products like that: high-yield savings accounts and certificates of deposit (CDs). Those short-term investments pay a set annual percentage yield (APY) — typically between 4 and 5%. But most people don’t use them.
At the end of last year, CNBC polled 1,000 Americans on how they save money. More than 8 in 10 (82%) of respondents don’t “utilize a high-yield savings account.” Most (57%) said they use “traditional or regular savings accounts.”
Reporting tip: It’s too easy to get bogged down in the weeds explaining the formula for compound interest. Economics and finance professors are good at explaining how it works. Luckily, many state universities have databases to track down an expert.
Invite them on the show to explain in plain-English.
Advise using an online compound interest calculator to determine how much to invest, and the amount they’ll expect to earn over time. Here’s one that’s powered by the U.S. Securities and Exchange Commission: compound interest calculator.
Recommend your audience checks with local credit unions — they tend to pay better rates on savings accounts and CDs than big national banks.
401(k)s
Companies give their employees free money. It’s an incentive to save for retirement in what’s called a 401(k) plan.
A 401(k) is a tax-advantaged retirement plan in which employees contribute a percentage of their salary. Many companies match a percentage of the employee’s contribution up to a specific limit. The percentage and limit will vary depending on your company’s 401(k) plan.
Because 401(k) plans are savings vehicles intended for retirement, the account holder can’t touch the money until age 59 ½. The account holder will be penalized if they withdraw the money earlier.
Some companies offer Roth 401(k)s, which function the same except how the taxes are handled. Roth 401(k)s allow you to pay the taxes upfront, rather than paying later with a traditional 401(k).
A Roth 401(k)s is a helpful investing vehicle because your future earnings grow tax-free, and you don’t have to pay taxes when you begin taking retirement withdrawals.
Reporting tip: Recommend your audience enroll in their company’s 401(k) plan. But take it a step further and advise them to contribute the maximum amount.
If a company will pay 50% of their employees’ contributions, it’s in the worker’s best interest to invest more.
Many people want to see more in their paycheck today and lose sight of how much they’re earning for the future. Recommend using a 401(k) contribution calculator, like this one from HR company ADP. Visuals help — walk viewers through the process using B Roll shots.
Mutual funds
Research from the Investment Company Institute says “mutual funds are the most common type” of investment — more than 52% of U.S. households own mutual funds.
Mutual funds get their name because you and other investors “pool your money together mutually to buy stocks, bonds, and other investments.”
Mutual funds are managed by financial professionals for a fee. Most everyday Americans don’t have the time or know-how to analyze individual stocks and create a diversified portfolio.
Investing in mutual funds allows you to purchase stocks with less risk than picking on your own. Like all investments, there is risk, but the investment model of mutual funds mitigates risk.
Mutual funds provide diversification with a wide variety of investment types. Here’s the beauty of diversification: Companies within the mutual fund will experience gains and losses. If a company in the fund is down, there are other assets making up the difference.
You can search for mutual funds online to find one that fits your financial goals. Mutual funds publish what’s called a prospectus. It’s basically a summary of what the fund entails, its fees, performance, and minimum investment amounts.
Many people choose to work with a certified financial planner to help map out these goals. But it’s not necessary to purchase a mutual fund.
Mutual funds are a long-term investment strategy. Investors should know panic selling when the market is down hurts your portfolio in the long run.
Reporting tip: Share with your viewers how to research the mutual fund. The SEC legally requires mutual fund brokers to submit their shareholder reports. You can access that SEC database here. Just enter the mutual fund’s name, ticker symbol, or central index key.
You’re also able to check the legitimacy of the investment advisor managing the mutual fund. Visit the SEC’s Investment Adviser database here. Enter the adviser’s or firm’s name. Use B Roll to walk them through the process.
ADDITIONAL RESOURCES
Joe Pye is the Managing Editor of Debt.com, which has helped millions of people get out of more than $12 billion in debt since its launch last decade. He can be reached at jpye@debt.com.
Finance 411 is a bi-monthly feature, presented by RTDNA and the National Endowment for Financial Education. Interested in becoming a contributor? Email info@rtdna.org for more information.