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When Your Paycheck is Your Bond

By Edited Jul 21, 2016 0 0

One of the best types of investment that you can count on is your earnings, especially if you receive a steady paycheck.

When creating your financial planning strategy, take your paycheck into account.

While the official statistics seem to show that unemployment is holding steady, if not declining, these statistics may offer little consolation to the currently unemployed.  Even if you are gainfully employed, your job may not be as secure as you would like it to be.

If you ask people what their biggest asset is, they might answer their house, their car, or their investment portfolio.  But, your earning potential is an asset that trumps all of the above.  You can think of your regular paycheck as a bond, providing income on a regular basis. It can also be thought of as a stock, with an unlimited potential to increase.  Either way, though, there are risks – bonds can default, stocks can drop in price, etc.

When considering the asset allocation of your portfolio, it may be wise to take your paycheck into consideration.  If you have a dependable source of income, that can weigh as a bond.  But if your paycheck is based on commissions or is otherwise unstable, this aspect of your financial portfolio resembles the risk inherent in stocks, so you might want to limit the other risk in your investments.  However, this analogy only holds true if your paycheck is guaranteed.  And, like bonds and stocks, next month’s paycheck may not be guarante

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The golden rule of investing is that younger workers, who have longer until retirement, can afford greater risk in their investments.  Using the analogy of a paycheck as a stock, the younger workers may be able to take greater risk in their employment.  But, as one approaches retirement, the possibility of unemployment (and not receiving a regular paycheck) is more dangerous.   If you feel as if your salary is less secure than it once was, consider decreasing your stock exposure and increasing your fixed-income investments.  If your salary begins to resemble a risky stock, you might want to safeguard your investments by minimizing the risk in your investment portfolio.

Your paycheck plays an important role in your investments.  Keep it in mind when determining your asset allocation for your investments. Today’s paycheck should not only pay your current expenses, but help finance your retirement.

  

Disclaimer: This article is for educational purposes and is not a substitute for investment advice that takes into account each individual’s special position and needs. Past performance is no guarantee of future returns.

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