Pratt suggested mutual funds as a relatively safe investment. With a mutual fund, you give an amount of money to the fund and it divides it up and invests it in different places. Investing is a wise option for any extra income, but many financial advisers urge caution and planning when investing.
When investing, it is necessary to have a reasonable expectation of the outcome, to have patience and not just focus on short-term returns, said Brad Pratt, a financial adviser at Pratt, Kutzke and Associates, L.L.P. in Mankato, Minn.
In the 1990s people were overzealous with their confidence in the technology stocks and expecting a quick fortune, when many ended up losing a lot of money, he said.
Pratt said he favors being a little conservative in investing, because the money being dealt with are people's life savings.
Pratt suggested mutual funds as a relatively safe investment. With a mutual fund, you give an amount of money to the fund and it divides it up and invests it in different places.
Pratt said investing in mutual funds allows for diversification, so not all your money is going to one place. "Your able to spread the risk out depending on what the fund does," he said.
Mutual funds are ideal for a medium term investment of three to 15 years because in mutual funds there are constraining boundaries, as opposed to stocks, said Adam Duey, a financial planner at the North Star Resource Group in Minneapolis.
He said that stocks fluctuate a lot, with a lot of ups and downs. This kind of investing could result in a high and quick return, but also runs the risk of losing all your money.
Retirement accounts are appropriate investments for the long term, and while there are many possible retirement plans, the two most popular are the 401(k) and the Roth Individual Retirement Account.
The 401(k), if available, is offered by the employer and allows for more money to be put in than in a Roth IRA, said Richard Dworsky, a financial adviser for American Express.
The money put into the retirement account is tax deductible or pre-taxed, because it's taken directly from your wages. Dworsky said that in many instances the employer would match the amount of money put in by an employee up to a designated percent. Although employers are not obligated to match, he suggested taking advantage of the match if it's offered.
The Roth IRA is different from the 401(k) for a variety of reasons. The Roth IRA is a plan you have to get on your own, not through your employer.
However, Dworsky said there is a limit to the amount of money one can contribute to their account per year, unlike the 401(k). The limit, which was adjusted for 2002, is $3,000 per year per person. Also, the money put in the account is not tax deductible, because the money is not taken as a part of your yearly income.
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