Investments are exciting! You get an opportunity to earn a nice return, and who couldn’t use a little more cash in hand? So, you quickly go through the SEC’s Office of Investor Education and Advocacy, and you think you’re ready to make your very first investment? Are you?
Making rapid investments without getting enough information and forming clear goals is a mistake. No one can tell you how to manage your finances, but you could surely use some warning before making a mistake. The numbers of a rising stock market are inspiring, but you still have to make few considerations before you’re ready to make real moves.
There are seven main things to do before you start investing. Once you have this foundation, you’ll set yourself in a safe direction.
Create a Clear Financial Plan
Before you start investing, you have to know what your current situation is and where you want to get in future. In other words, you need a clear financial roadmap. Without a plan, it’s more likely that you’ll engage in risky investments that would make you lose your money.
If necessary, hire a financial professional to help you construct the plan. They will help you set goals and evaluate your risk tolerance.
Define Your Net Worth
Your net worth is the primary financial aspect you should be worried about. The net worth represents the total value of everything you own. All your properties, including your home, car, savings accounts, and any valuables, belong to the net worth. However, all debts take part in the net worth, too, as they reduce the total value of what you own. So, evaluate all property and reduce its value with the full amount of student loan, credit card debt, mortgage, and so on.
Your net worth will become your main focus. It seems like an obvious thing, but most beginner investors are focused on checking their account balance instead of checking how they are boosting their net worth.
Pay Off All Debts
Speaking of the net worth, you must improve it before you start investing. You can do it by paying off your debts and saving some money. Then, the investments will only give your income a boost.
If you have any high-interest debts, it’s wise to get rid of them before you start making investments. There’s hardly an investment that offers as much long-term stability as the one you get from paying off all your credit cards.
Think about it: paying off a debt with a 10% interest rate is basically the same as making an investment that would return 10% per year after taxes. Plus, your net worth will improve once you get rid of your debts. From there on, you can start making investments without being worried about any debts holding you back.
Define Your Comfort Zone
Every investment comes with a certain degree of risk. Whether you’re considering investing in mutual funds, bonds, or stocks, it’s important to evaluate and understand that risk before you go any further.
The golden rule of investing is: don’t invest more than you’re willing to lose. If your plan is intelligent enough, it will get you earnings without placing your financial security at risk. If not, you’ll lose more than you’re comfortable losing.
If you see investments as a long-term opportunity, you’ll probably benefit more from investing in assets with greater risk, such as bonds or stocks. If you’re not financially powerful, you’ll probably be better off with investing in cash equivalents, which carry less risk. Consider this as a business opportunity that demands a proper plan.
Work on Your Spending Habits
What’s the difference between your income and your spending? It’s your comfort zone! You can use it to make other investments without being concerned about losing valuable money. If you control your personal spending habits, the comfort zone will become larger, so you’ll have more money to invest. It’s pure logic and it works.
When it comes to spending less money, there are few things you can do:
Have a plan when you go to the grocery store. Buy only the things you need. You’ll be surprised to see what a difference this makes.
Don’t buy clothes when you don’t need them. Do you really have to buy new shoes every single month?
Whenever you’re tempted to order something online, think: do you really need it? Make only smart purchasing decisions. Remember: you want to be left with more money for investments.
Get an Emergency Fund
If you invest all your extra cash, you’ll be left with nothing for emergencies. What if your car breaks down and you have no cash set aside? What if you get really sick and the hospital bills pile up? What if you lose your job? You’ll have to take a payday loan, rely on your credit card, or borrow from friends. Remember: any debt will immediately decrease your net worth.
Before you start making investments, it’s important to create your emergency fund. Save that money with a bank of your choice, and you can access it whenever an emergency occurs. You need at least three months of living expenses set aside to feel safe and comfortable no matter what. If you usually spend $2000 per month, then you need at least $6000 in your emergency fund. If you spend some of that money, make it up with no delays.
Do you know what investment options are available for the amount of money you’re willing to invest? Do you know how to interpret the opportunities? Do you have foundational knowledge of stocks, bonds, mutual funds, real estate, precious metals, and any other investment option?
The first investment you should make is in your knowledge. You’ll learn a lot from a free online course. You’ll also benefit from a book for beginners, such as Investing for Dummies by Eric Tyson. When you have a good base of knowledge, you’ll know how to see the difference between two or more similar investing opportunities, and you’ll be closer to making the right decisions.
Get your foundation! It will prepare you for making safe investments without risking your financial stability. You won’t stumble when you start off on the right foot!