Sometimes investing is not about how many funds, stocks, ETFs, or any other type of investment you have but rather the least amount possible with the maximum diversity. Those who are new to investing, often have problems managing a larger portfolio and staying diversified. The two portfolios listed below are easy ways to stay diversified while minimizing commissions.

One Fund, One Portfolio, No Commissions
Looking for a portfolio that requires very little if any management? Vanguard Target Retirement Funds offer investors an easy way to create a diversified portfolio with little knowledge or maintenance. All you really need is to pick a date, set up reoccurring deposits, or make deposits when you choose. This is the easy portfolio an investor can have as they readjust with your age to put more of your cash into income producing assets. This portfolio is more for retirement accounts, something you can make monthly or yearly contributions to and forget. This fund is not for trading; but rather for the buy and hold method.

Want more control? Try two ETFs.
If you are looking to be more active in your portfolio while keeping cost down, try a two ETF (exchange traded fund) portfolio. The only ETFs that you need are SPY (which tracks the S&P 500) and AGG (which is a bond fund). An easy way to know what percentage of the holdings take 100 and subtract your age, this is the percentage of the SPY you should own. The rest goes to AGG. If you want more risk just add more to your SPY holdings, and for less risk add more to your AGG holdings; pretty simple concept here.

These two portfolios are just an easy way for investors to start investing or to build a foundation on which to build a broader portfolio which I will write about in future posts. Many investors don’t want to look at the stock market on a daily basis and these two portfolios are very easy to run and keep commissions low. If you are a new investor, I would start with the second portfolio and watch how each ETF acts. You will know when to purchase more and when to sell a portion after seeing patterns.

One of the best financial tips I every got was, “It’s not how much you make, but rather how much you keep.” Paying yourself before you pay others, including bills, is the easiest way to accumulate wealth. What do I mean by paying yourself first? Before my bills, are you crazy? Keep reading and you see how to make your wealth grow before you allow others to get their wealth.

How Do You Pay Yourself First?

Easy, when you get paid take a portion of that money and set it aside in one of the following accounts:

401K

The easiest way to pay yourself first is to setup a 401k and have automatic weekly or bi-weekly contributions. You also get the added benefit of lowering your taxable income. Talk to your employer’s finance or payroll office to set up your 401K.

IRA

If you don’t have access to a 401k, then you need to setup an Individual Retirement Account. You have two options: Roth or Traditional (please read the advantages of both before selecting one over the other). Fidelity has a tool that can help you in your decision process. Make monthly deposits or a yearly contribution as you wish. A great way to fund this account is to take your tax refund and deposit it immediately.

High Yield Savings Accounts

Make sure you have an emergency fund available. A high yield savings account, like Emigrant Direct, is a great place to stash for any unforeseen emergencies. Ideally, you should have about 12 months worth of income put away for hard times. Make monthly deposits to your emergency fund until you get 12 months of income. Your emergency fund should have priority.  Get more information on high yield savings accounts.

Investment/Brokerage Accounts

These are a little more risky than the other accounts, especially if you manage them yourself, but can also produce significantly higher returns. For most investors I would recommend the use of ETFs until you have some experience.

The IRA and 401k have bonuses: If you, for some reason, have to file bankruptcy these accounts are protected. A 401k also lowers your taxable income, saving you from paying more in taxes. A Traditional IRA can also, but has limitations. I would recommend anyone eligible for a Roth IRA. Get one.

Pay yourself first and survive on what you have left over. How much you pay yourself depends on you but I would recommend at least 10% of your pay. Make it a goal to pay yourself a little more each year. If you get a raise, automatically deposit the amount of the raise into one of the above accounts. These accounts are the foundation for building wealth and paying yourself before others will insure that you’re building your wealth before building others.

Roth or Traditional? Why does it matter which one I choose, as long as I have an IRA…right? Wrong! There are benefits that both accounts have; benefits that can help you now or later during your retirement years.

How does your income stack up?
Your income can eliminate your from getting a Roth IRA, but a Traditional IRA doesn’t have income limits. If you make more than $100,000 (filing single) and $160,000 (filing married), then you will have to go with a Traditional IRA. Otherwise, you can choose to go with a Roth IRA.

Benefits of a Roth IRA

Those who qualify for a Roth IRA, should choose the Roth over the Traditional. Benefits of the Roth come later rather than sooner, helping you out more during your retirement years. Some of the benefits of the Roth include:

• Contributions are from post-taxed income. Since deposits come from income already taxed, withdrawals are not taxed during retirement.
  If you need the money early, you can take it out without paying penalties or taxes, unlike the traditional.
• $5,000 yearly contribution limits. $6,000 age 50 and over.

Benefits of a Traditional IRA

Traditional IRAs are not only for those who don’t meet the income requirements of the Roth. If you need more of your money now, choose the Traditional IRA as is lets you deduct taxed on your contributions. There are benefits to the Traditional IRA that many people make their decisions upon such as:

• Contributions can be deductible (depending on income level)
• Money grows tax deferred (taxes are paid at withdrawal)
• $5,000 yearly contribution limits. $6,000 age 50 and over
• Available to everyone.

4 Questions To Make The Decision For You.

With the current market conditions, many people are trying to obtain money from whatever source they have available but your 401k should not be one. Cashing out now, with the markets down almost 50%, is not only a terrible choice to make but also a very expensive one too.

Markets will recover, maybe not as soon as you want but when they do it will be a rapid move up. Many people can handle the fact that their accounts are 50% down. Although, I am not down that much, I am still in the market because when it does recover I want to be in to enjoy the ride up.

Cashing out your 401k right now will cause you to realize losses that you may not be able to account for on your taxes. Plus, you have to pay early withdrawal fees, federal, and state income taxes out of what little bit you have left over. If you can wait a couple years, you will be thanking yourself. As for me I am still investing but I am a bit more “choosier”, as it were, now than before.

Look around and see what other options you have available and try to use them. If you have nowhere to go then at least think long and hard about cashing out your 401k.