We all know that investing is a great way to make our money work for us. However, there are several questions you need to ask yourself first – before investing. Just because you’ve set some money aside doesn’t mean you’re ready to invest yet. Almost all investing carries a certain degree of risk with it, and while risk can be managed, it is unavoidable. The questions below will help you understand if you’re ready to invest.
1. Have You Paid off Your Debts?
This is the most important question you’ll need to answer. If you have outstanding credit card debt, the interest rate you’ll be paying on the cards will definitely be more than what you’d make if you invested. Paying off your debts is the first step towards financial independence and freedom. So settle them first.
2. Have You Saved up an Emergency Fund?
Before investing a cent, make sure you’ve saved up about 3-6 months’ worth of income to help you get through any rainy days. Once you’ve saved up this sum, you may leave it in a money market account or a certificate of deposit. In this way, you’ll have liquidity and still be able to earn some interest. Do NOT invest your emergency fund in stocks, funds, etc. Always invest what you can afford to lose. Investing is risky.
3. What’s Your Goal?
Before investing, you’ll need to know your financial goals. Are you trying to save up a nest egg for retirement? Or are you trying to build wealth? Knowing your goals will help you decide which type of investments to go with.
4. What’s Your Risk Tolerance?
Generally, when you’re younger, you’ll have higher risk tolerance. You always have time to earn more money and can make up for any losses. If you’re a middle-aged man with a family to support, you’ll need to be more cautious. Seniors who are about to retire will need to be the most prudent of the lot. Your risk tolerance will determine which investments are suitable for you. Risking it all and losing a chunk of your investment is far worse when you’re older.
5. Can you Diversify?
In order to diversify, you’ll need more funds. For example, if you invest in stocks, do you also have money to invest in bonds? Since these 2 investment vehicles move in opposite directions, if one drops drastically, the other will do well and things will more or less even out. The amount of money you have to invest will determine the level of diversification you can afford. Generally, you’ll want to invest cautiously until you can diversify and take on riskier securities.
6. Can You Meet The Minimum Accounts?
Once again, this depends on how much money you have. Some stocks have a minimum purchase size and so on. Let’s not forget the fees too. You know what they say, “Money makes money”… and you need enough of it to start investing.
7. Are You Aware of The Risks?
Knowing how risky an investment is is crucial before you take the plunge. Do not invest in securities that you know nothing about. Always do your research first. You must know the fees, how the investment works and how much you can expect to make. Knowing all of this will help you to make an informed decision before investing. Ask yourself these 7 questions before investing your money… and only invest if you feel like you’re truly ready and financially comfortable enough to risk some of your money to make it grow. “Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes