The priority of money is a process of determining which investment vehicles can help us achieve our goals the fastest. It is largely due to understanding the tax advantages of the various investment vehicles, and utilizing the vehicles that can help you get the highest after-tax returns.
From Table 37.1, we see that an individual could contribute a maximum of $4,000 to a Roth IRA and $15,500 to a 401(k) in 2007. The Roth IRA is tax-eliminated, meaning there is no tax benefit now but there are no future taxes on principle and earnings. The 401(k) is a tax-deferred vehicle in which the contributions are tax-deferred, so you get the tax benefit now but must pay taxes on principle and earnings when you withdraw the money after age fifty-nine and a half.
Asset classes are broad categories of investments with specific and similar risk and return characteristics. The three major asset classes are cash and cash equivalents, fixed income (bonds), and equity (stocks).
The difference between investors and gamblers is that investors are willing to assume risk because they expect to earn a risk premium when they invest, whereas gamblers are willing to assume risk even when there is no prospect of a risk premium.
The main goal of cash and cash equivalents is to preserve capital. The main goal of fixed-income investments is to provide income and to earn returns in excess of inflation. The main goal of equity (stock) investments is to provide growth and to earn returns in excess of inflation.
