Last year, we posted about the ‘Buy Term and Invest the Difference’ strategy for covering life insurance. To recap, this is a straightforward idea.
It involves replacing a permanent life insurance policy with a term life insurance policy, and investing the difference externally (since a term policy is typically less expensive, to begin with).
There are pros and cons to this strategy, to be sure. But on the plus side of things, it’s a tidy way to cover life insurance while setting aside some additional funds for other forms of long-term financial planning and protection.
The question then, however, becomes where specifically to invest that difference. So in this follow-up post, we’re going to look at some of the possibilities.
6 Places to Invest the Difference
Mutual Fund
The mutual fund option is the one that was mentioned in the aforementioned piece, and many will view it as one of the safest and most productive ways to handle extra investment capital.
For those who haven’t looked into this option before, a guide to mutual funds on U.S. News & World Report describes mutual funds as being “ideal for investors who don’t have time or the ability to choose stocks.”
And while that’s a pretty simple way to define an entire type of investment, it’s also a good way to think about it!
A mutual fund is a bundle of stock investments you can buy into, but which is managed professionally by an experienced trader.
Putting a little bit of money into a funny like this allows you to withdraw a portion of gains relative to your contribution when you choose to — without having to manage the stocks in the interim.
Additionally, you can typically choose a mutual fund based to some extent on risk profile. Some are meant to be a little bit more conservative, and others somewhat more daring.
Index Fund
An index fund functions much like a mutual fund, with the key difference being that it’s essentially automated. With a mutual fund, as mentioned, there is the active management of assets by a professional.
An index fund by contrast bundles assets that are included in a given index (with the S&P 500 being the most noteworthy example). The fund simply follows the performance of that index and thus doesn’t need to be managed actively.
Fees can be slightly higher for an index fund, but gains are often marginally greater, making this another worthwhile option for passive long-term investment.
Retirement Plan
Depending on what kind of retirement plan you have set up, you can also “invest the difference” right into the said plan.
Not every retirement plan allows for contributions past a certain point, which is why this may or may not be a feasible option. (Particularly if you’re saving through a plan connected to your job, for instance, you may not be able to contribute more at will.)
Nevertheless, if you’re interested in putting freed-up capital directly toward investment in your own future, padding a retirement fund is worth considering in some cases.
You can never put too much money into this particular kind of savings.
Precious Commodities
Precious commodities aren’t quite as stable as strong mutual or index funds. But particularly for those who may be looking to diversify long-term investments, commodities can still be sought after for growth over time.
Gold, in particular, leads this category and has a reputation for slow but sure growth over time. To that point, The Street’s look at gold’s trajectory just a couple of years ago predicted a $12,500 gain in 30 years’ time (simply based on past trends and known circumstances).
That’s not a guarantee, to be clear, nor is it as lucrative as some of the gains people hope to enjoy through stocks, or even riskier side investments.
But it does show why some ultimately look to tuck a little bit of capital away into precious commodities. For a long time, they’ve proven to be worthwhile considerations.
Cryptocurrencies
In a certain sense, cryptocurrencies are the new precious commodities — valuable digital assets that emerged from nothing but have become very popular among investors.
What’s important to note however is that while an asset like gold is known specifically for stability and steady gains, cryptocurrency is synonymous with volatility.
A recent piece on bitcoin’s rises and falls by FXCM shows as much with a clear timeline. Bitcoin — the unofficial leading cryptocurrency in a sense — has had dramatic declines and sensational rallies intermittently in just the last few years. And for many, this means it’s not an appealing investment vehicle.
Nonetheless, many others see significant long-term potential, which is why it’s worth mentioning as a diversification option.
It’s already been proven that even putting a little bit of money into cryptocurrency has the potential to pay off handsomely, even if it’s a very difficult market to assess or predict.
Startups
There is also the option of startup investment, which has become easier for ordinary people (as opposed to career venture capitalists) to take part in.
There are numerous apps and websites that facilitate startup investment, giving investors the chance of earning significant returns on companies that “make it” in the long run.
Ultimately though, this is more akin to crypto investment than a reliable fund or something of the like.
Companies are unpredictable in the early going, and while there’s significant return potential, there’s also a greater chance the investment never pays off.
It’s something worth considering for diversification and a bit of long-term possibility, but it is not a full investment strategy.
Conclusion
In the end, the decision of where and how to “invest the difference” is a personal one and should be made with regard to your own circumstances — as well as with the input of a professional adviser, if you have the opportunity to consult with one.
But we hope that the ideas above have helped to clarify some of the available options for this kind of investment.
