Deciding to invest your money for the future is a wise move, and an integral component of good financial hygiene. Before you begin searching for the next Google (NASDAQ:GOOGL) or purchase a mutual fund, it is important to develop a pre-investment strategy.
Doing so will allow you to understand how much money you can afford to invest, while also helping you to maximize your ability to reach your investment goals. Here are five steps to consider when looking to embark on your investing journey.
Know Your Finances
While it is advantageous to put money away for the future, this should not come at the cost of your ability to cover your current expenses.
For this reason, creating a budget to help you understand how much you have at your disposal is an important step to take. There are a number of different budgeting mechanisms and templates, though the 50-30-20 rule is a popular one due to its simplicity. Under this approach, you will devote 50% of your after-tax income to necessities such as housing and food, 30% to discretionary purchases, and save or invest the remaining 20%.
Part of undertaking this financial self-audit is also being aware of your existing debts and liabilities. If you are in credit card debt, for instance, which tends to compound daily, it might be better to rid yourself of this liability first before starting to put your money into an investment account. (If you have public student loans, however, which have much softer repayment terms, your calculus might be different.)
Understanding the sum of money that you can safely begin investing without compromising on your current needs is a critical step before you can form an investment strategy.
Look at Your Existing Options and Upcoming Expenses
Along with looking into the state of your financial affairs, it is also a wise move to understand the various investment options you have at your disposal. Many employers offer their workers benefits, including matching 401(k) plans, Flexible Savings Accounts, and SEP-IRAs.
With a matching 401(k) account, employers will agree to match up to a certain percentage of your individual contributions. For example, assuming your employer offers a 5% match, if you are willing to devote 5% of your pre-tax income to your retirement account, you will effectively be devoting 10% of your pre-tax earnings towards your retirement. This is a 100% return on your investment (though there are often vesting requirements), making an extremely compelling argument for investing your money in the 401(k) before looking elsewhere.
In the same vein, take the time to think about your upcoming costs in order to anticipate the amount of cash you will need on hand to cover them. The ultimate objective of investing your money going forward is to make sure that you are able to live the life you desire in the future. That includes avoiding going into debt in the here-and-now.
Think About What You Wish to Save For
Investing your monies is a means to an end, not the goal itself. In other words, it is important to define what it is you are hoping to accomplish with your funds. Doing so can help determine the types of investments you should be searching for, along with the level of risk you are willing to absorb.
For many people, long-term savings goals revolve around ambitions to retire, purchase a house, or save for a child’s education. Each of these worthwhile goals has different time horizons, and will thus be suitable for various types of investments.
For instance, an individual beginning to save for retirement in 30-years can afford to be more aggressive in their initial approach, as they will have the opportunity (along with many more years in the workforce) to recoup any losses that occur in the early going.
On the other hand, an individual looking to save for a down payment on a house within the next few years would have a different mindset, as they would need to be more conservative. They would also be wise to invest in liquid assets, which would allow them to access these funds at short notice.
Before you can fully plan your future investments, you should know what your desired outcome will be. This will help you to design an investment program that meshes with your goals.
Research the Types of Investments Available
There are a number of investment vehicles at your disposal, with varying degrees of risk, liquidity, and accessibility. Learn about the different types of options that you can choose from, be it stocks, bonds, ETFs, or Certificates of Deposit.
TipRanks has a number of tools that can help you to review the historical performance of publicly traded assets, their current assets and liabilities, and other pertinent data that can help you increase your knowledge and understanding
By the same token, take some time to learn about the different types of investment strategies that are available.
Doing so will allow you to narrow down your decision-making, and being well-informed on the numerous options will enable you to research and focus in on those that seem the most appealing to you.
Internalize that the Long Game Works Best
Markets tend to reward those who are willing and able to keep their money invested for the long haul. They both rise and fall, and if you are able to keep your money invested during downturns, you will likely enjoy the ride when the market eventually shoots back up.
The other side of this coin is the wonders of compound interest, whereby, the money you gain in interest will start to rack up its own earnings as well. Money invested is money gaining value, and the longer you can keep your funds in accounts dedicated to accumulating wealth the better off you will be.
The idea of devoting a certain percentage of your income to savings and investment, be it 20% or another figure, can help ensure that you are making regular contributions to your savings goals. Removing these funds from the pot of money available for consumption will help you remain focused on your long-term goals instead of short-term indulgences or impulse buys.
Conclusion: Getting Ready to Invest
Making sure to thoroughly research and prepare your investment strategy before diving into the markets is time well-spent. It will help you to invest with clear eyes and a focused pursuit of your long-term objectives.
The road to financial security is long and winding, with plenty of potential detours and potholes along the way. These steps can help you learn to ask the right questions as you get started on your journey.
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