Savings, Debt Reduction and Mutual Funds

Savings is a key component of any solid financial plan. Whether it is for retirement, long range goals, or short term emergency funds, savings is an essential function for each of us to perform in order to prevent an escalation of debt and maintain our financial health. When an individual decides to begin a savings program he must first choose an investment vehicle which best meets (and hopefully exceeds) his goals. One very popular vehicle in today's financial world is the mutual fund. Let's examine exactly what these funds are and how they are best used.

Mutual funds are a collection of stocks and/or bonds. Each fund is headed up by a manager who actively maintains the portfolio and determines when to buy and sell. When you buy shares of a mutual fund you become a shareholder and are entitled to voting privileges that are proportionate to the amount of shares owned.

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• Can be used for a variety of purposes. Mutual funds can be used for 401ks, and IRAs, as well as shorter term investments.
• Managed by a professional. The average investor does not have the time or expertise to actively manage a large portfolio of funds. By investing in a mutual fund this management service is provided.
• Historically stocks are good investments. The majority of mutual funds are composed of stocks. History has shown that over any extended length of time stocks bring investors a relatively high rate of return.

How do you know which fund to choose? There are a variety of services available that rate mutual funds based on past performance and a variety of other variables. These are very useful tools to assist you in your decision making process. In addition, your choice will be greatly determined by your level of risk tolerance. If you are very adverse to risk than a conservative bond fund may be a good option. If you prefer to take more risks than you will want to invest more heavily in stock funds. Some experts recommend a product called index funds. This is a portfolio of stocks which attempts to simulate the performance of an index by including similar companies in similar proportions. A stock index (i.e. S&P 500 Index) is a group of diverse and widely held stocks that when viewed together form a barometer for how the market is performing. Index funds offer a couple of strong advantages. They have higher returns than 80% of actively managed funds and they have lower fees. These facts make index funds a strong option to consider.

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt management services nationwide.