Basic Finance and Investing

This is a writing sample from Scripted writer Josh Wallman

Top Six Financial Sectors for Beginning Investors

  • Banking
  • Insurance
  • Real Estate
  • Stock Market
  • Finance
  • Trusts

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Everyone Starts with a Bank

The first interaction anyone has with money is usually with a bank. This is where their first paycheck goes because it is a safe place to deposit as the Federal Deposit Insurance Corporation (Federal government) guarantees each deposit up to $250,000, and depositors have easy access to that money. The bank does not pay depositors much for those deposits, but that safety net ranks very high on those depositors' minds. That interest is supposed to stay ahead of inflation so the money grows. That works when inflation is low (2.3%). However, when inflation rises, interest rates often do not keep up and the money starts to lose ground. At that point, the depositor must look for alternative investments. With inflation as of November 2021 at 6.81%due to the supply chain bottleneck, and interest rates not keeping up (the highest being 4.25%), depositors must now look elsewhere to place the bulk of their assets.

Insurance Can Be a Great Investment

Insurance is often not seen as an investment but rather as only a cost to protect property or family. But there are multiple avenues of investment in insurance from life settlement purchases to annuities to child life insurance plans that grow tax-free and can provide a substantial return as well.

Both term and whole life insurance plans pass tax-free to progeny. However, the interest generated by the plans is taxable. Whole life plans can be surrendered to supply additional household funds when needed or sold as settlements for retirement funding. Those sales will be at a fraction (about 20%) of the face value of the policy but that will be more than the surrender value. However, if you have a better place to put the money, that cash can be a good change.

But, if you are the buyer of those settlement policies, the premiums you pay supply you with both a high annual interest rate and the death benefit of the policy when the seller passes away. The buyer takes over paying the premiums while the policy remains in the insured's name. So the buyer could receive 7-14% on the cash they paid for the policy every year and $1M (if that is the face value of the policy) when the seller passes.

Annuities are insurance policies the investor purchases in lump sums that generate interest. The insurance company then pays that investor back the full amount of that investment each month while gaining a greater interest amount than the bank would pay. So the total amount of the annuity grows every month while slowly paying the depositor each month for the privilege. There is also one additional benefit to annuities: they never decrease regardless how poor the market itself performs. When the market drops, the annuity value remains constant and then rises again when the market does. So the investor's money outperforms the market and is very safe. Annuities don't grow as fast as highly leveraged market equities but they don't fall either.

Insurance policies in the name of children are a way for parents to invest in their children tax-free and when the child reaches maturity, the policy converts to an adult policy at the original premium rate. By the time the child reaches middle age, the policy can be enough to purchase a home.

Real Estate Always Rises

Homeownership is generally considered the key to wealth management. There are too many benefits to it over renting. Beyond home value appreciation, there is the interest deduction on your taxes and that is just one. Homeownership can increase wealth faster than other avenues because ownership generally raises credit scores which make the homeowner eligible for additional loans. They can turn those loans into more education or a business both of which increase their asset value in the economy.

But that said, there are many other avenues to investing in real estate as well. You can flip homes, buy rental properties whether residential or commercial, invest in real estate trusts (REITS), join real estate groups or mutual funds or buy homes and simply sell much later for a profit. There is a benefit and cost to each.

The Options

  1. Flipping homes can be a very lucrative investment if you are willing to bid low and then put in the funds to rebuild the home so that you can sell it within a short time frame for an expected profit. That can take a lot of effort and planning.
  2. Buying rental properties can cost the same as flipping homes but instead of selling the home immediately after repair, you collect rent on it. But that means you are responsible for maintaining the home and using the rent to do that. Depending on the area chosen, rental properties can provide a substantial retirement income or be a headache to maintain without much profit. Commercial properties tend to have a better return on your investment, but only if they are in a productive area. They cost far more to buy and maintain than a single home, and if renters are not secured, that mortgage can get costly.
  3. Real Estate Investment Trusts (REITS) can be very profitable for a far smaller investment than either of the above. REITS are groups of properties that are traded on market as a corporation so the corporation pays dividends to avoid paying tax on the profits. So you can buy shares of the REIT and take the dividends for your return on the investment as well as any appreciation that takes place on the property.
  4. Real Estate Investment Groups are simply mutual funds that invest in properties rather than equities. As an investor, you purchase shares of the fund and the properties are in your name. The fund hires a property manager and the rents and lease revenue are pooled to protect against the lack of renters. The good part is that it costs little money to invest while the bad part is that the return may not be as high as other investments and the investment group fees may be high.
  5. Real Estate Mutual Funds buy a greater selection of properties than those above with a similarly limited investment capital needed from the investor.

The Stock Market

The traditional place everyone thinks of first for their investment portfolio. The average return of the stock

market over the last 30 years is 10.72%.)or 8.29% when adjusted for inflation. And that time range covered the

financial meltdown of 2008. So, imagine where your finances will be in 30 years if you were to use dollar value

investing consistently over the next 30 years. Imagine where you would be if you increased that investment as

you increased your gross income through promotions over the next 30 years. You can play the market as many

do, and some do get lucky just like in a casino, but most do not. Or you could just treat it as a regular

investment. The market goes down temporarily but rises permanently.

Financial Investing

This represents all other types of investments such as buying a business, capital investing, buying long or short-term bonds, treasuries or commodities like farm products, purchasing art or classics of any sort. Venture capital

investing is normally very expensive and relegated to high profile investors but there are platforms available to

the common man or woman as well. Classic and modern art generally appreciates at 10% per annum

according to a study from Stanford Business School. Compounded annually, you could do worse with such an

investment.

Trusts and Estates

Estates have been used to hide money from taxes for centuries as the estate assets are handed down to the

beneficiaries tax-free. It is how most of the wealth in the United States has been acquired. Trusts act in a very similar fashion and a [Collective Investment Trust](https://smartasset.com/investing/collective-investment-trust#:~:text=Collective%20investment%20trusts%2C%20also%20known,tax-exempt%20pooled%20investment%20vehicle.&text=These%20assets%20are%20then%20pooled,bonds%20and%20even%20mutual%20funds.)is designed to do this with a combination of individual investment vehicles. So money from IRAs, 401Ks, and the like can all be combined in this type of trust and allowed to grow without tax. The downside to this investment is that is not regulated by the SEC but instead by the OCC (Office of the Comptroller of the Currency) which is a little less restrictive. So, you would want to know who is managing the fund just like with any mutual fund. However, the benefits to having a good manager and a long-term plan can be profound.

Written by:

Josh Wallman
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I spent 10 years in academic publishing editing professorial research. The topics ranged from computer engineering to finance and social anthropology. It may have been the most fun I had at a job. I spent the next five years in the tech industry as a software engineer. Then I opened my own business educating young people. That was easily my greatest challenge and success. And then I started writing about all of it. That was 10 years ago. Part of that time I was also in the insurance industry to see how that worked. It has been quite a run....
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