8 Things to Do Before You Start Investing
There are fundamental steps you need to take before you start investing. There is nothing bad about investing. In fact, investing is one way of securing your future. When you invest, you are actually saving for the raining day. No matter how strong you may be today, a time will come that you will not have the physical strength to do all what you do now. Therefore, what you do today will determine the kind of life that you will live when you grow old. That is why everyone is admonished to work while it is day, for the night comes that no man will be able to work. That is just a parable. It is not enough to work, you must also set aside part of what you earn today for the future.
Having known that it is necessary that everyone invests for the future, you need to be guided so that you don’t lose your hard earned income. Therefore, before you start investing, you need to take the following steps.
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Pay Off Your Debts
Must you pay off all your debts before you start investing? It depends on the types of debts you are carrying. If you have high interest debts, it is better you pay off the debts before you start investing. It may be difficult to find investment opportunities that will give you high returns that will be higher than the interest rates you pay on credit cards. Even if the rate of returns on the investment seems to be higher than the interest rates you pay on your debts, you still need to understand that every investment carries some elements of risks. So, there is no hundred per cent assurance that the investment will yield the desired returns. But for somebody with a mortgage loan, you may not need to wait till you have paid off the entire loan. If you are to wait, you may soon realize that you have already reached your retirement age and you don’t have any investment anywhere. For instance, if you are 30 years old and you borrow a 30 year fixed mortgage loan, it means you will need to wait till you are 60 years old before you start investing. This will be a too long period wait. Once you have cleared your revolving or personal loans, it will be a good time to start investing.
Have Emergency Fund
The importance of having an emergency fund cannot be over emphasized. After finishing paying your high interest debts, you need to start putting money into your emergency fund. Your emergency fund may be a savings account where you deposit money into on a regular basis. But you don’t use the money in this account for your monthly expenses. You only tap into your emergency fund to meet unplanned or sudden expenses such as medical expenses, burial expenses and unplanned trips etc. Experts advise that everyone should have money that can cover, at least, between three to six months expenses in their emergency fund. If you rush into investing without having enough money in your emergency fund, you may be forced to terminate your investment if you need to pay some bills which are not part of your regular monthly expenses. And this can lead to a loss.
Get Organized
You should learn how to plan your finance. The starting point is for you to create a budget. You list all your sources of income in other to ascertain what you earn every month. Thereafter, you list all your expenses which may include monthly mortgage payment or rent, food, cloth, utilities, transport and groceries etc. Just ensure that all the possible expenses are included. By the time you finish this, you can now look at those areas where you can cut down your expenses in order to have positive balance at the end of the month. With this, you can easily determine how much you can safely set aside every month for savings and investment purposes. At times, you may receive gifts, bonuses or tax refunds, you can channel that into your investments.
Invest in Yourself
Education is the investment that yields best returns. There are many things to learn about personal finance. You need to invest in yourself first. Investing in yourself may not mean you need to break the bank. There are many free resources on the internet. You can set a goal of reading at least one article on personal finance per day. But I suggest that you should be more aggressive at the initial stage. This will help you learn fast.
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Set Your Investment Goals
How do you set investment goals? This is not difficult to do. You can ask yourself these questions: Why do you want to invest? How much do you need to achieve the goal? How soon must you realize the goals? For instance, your investment goals can include something like to invest towards your retirement. You may want to retire when you are 55 years old. You will need to determine how much money you need to have when you attain your retirement age. From then, you can work backward to determine the amount you will need to be contributing into your retirement account every month. The rate of return to expect on the investment also play a key role. Other investment goals may be to save towards home purchase. You may want to go back to college or you may want to save or invest so that you have enough money to start your own business in the future. Your investment objectives will influence the type of investment decision you will make.
Examine Yourself
What is your attitude to risks? How will you describe yourself? Are you a risk taker or you are risk averse? If you are a risk taker, you will be able to make high risk investment. There is one thing about investment. The higher the risk, the higher the likely returns. Nevertheless, that does not mean you should invest blindly. Your age may determine the kind of risks you should take. When you are still young, you can afford to risk your income on growth stocks for instance. If it happens that you lose all, you can still start all over again. Also, you still have income that can support you. But as you are approaching your retirement age, your attitude to risk must change.
Understand the Investment
There are different investment vehicles such as stock investing, mutual fund investing, real estate investing and so on. Each investment has its peculiarities. You should understand the risks and rewards that come with the type of investment that you are interested in. It is important that you don’t invest in an asset you don’t understand no matter how promising it might look. Every successful investor knows how to remain in the area they truly understand.
Engage a professional
Although this is optional, it may be necessary especially if you don’t have time to carry out your own research. Professionals are experts in their fields. They understand what ordinary people may not know. Therefore, there is nothing stopping you from leveraging on their expertise. They can save you some headache.
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Those are the basic steps you should take before you start investing. Once you are able to do this, you are free to go. As mentioned, don’t forget that every investment has its own risks. Taking those steps will help you minimize your risks.