Investments rarely make people rich quickly, so if you want to earn large sums of cash in a short timeframe, this may not be the right route to take. Plowing your money into investments is a significant decision, and it is vital to understand that there are risks and no guarantees of success. Yes, your money may be earning a pitiful amount of interest in a savings account, but is locking it into a financial product the right alternative?
There are many questions to consider before you start investing. Ensuring you know exactly what you are getting into and whether investing is the right choice for you will help you avoid making any expensive mistakes along the way. Here are some of the questions to ask yourself before you start investing to ensure you make the right decision:
Why Do I Want to Invest?
Understanding what you want to achieve by investing your money is essential. Are you hoping to build a nest egg for the future to gain financial security in retirement? Or, maybe you are tired of your savings not earning much interest and want to start seeing a healthy return. But, if you hope to invest simply because everyone else is doing it and you feel you are missing out, you are more likely to make poor investment decisions. Having a clear idea of why you want to invest and what you hope to achieve will provide you with a clear goal and help you make informed investment decisions.
Am I Able to Invest?
Before you start investing, it is essential to consider whether you are eligible. Government restrictions are in place to ensure trading and investing are carried out legally and ethically. Before you start investing, it is wise to check the rules to ensure you will not inadvertently breach them through your financial activity.
As well as following U.S. Securities and Exchange Commission rules, you need to be aware of other barriers that could prevent you from investing. If you decide to invest in your own start-up business but have had financial issues in the past, this could cause problems. Any problems with your financial conduct in the past may cause you to be on the match list of banned merchants and make it challenging to get a merchant account. This would prevent you from processing credit card payments for your business and could impact your ability to make money from it. If you find yourself on the list, you do not need to give up on your hopes of investing in a business to run. Instead, you could seek professional legal advice to understand how to get off the match list and be accepted as a merchant.
How Much Can I Afford to Invest?
Calculating how much you can afford to invest is essential. Never invest more money than you can afford, as there are no guarantees your investment will see a return. So, before you even think about investing, it is wise to ensure you have an emergency fund in place. If your financial circumstances change, you need to know you have money readily available to cover your living expenses. Advice on how much to keep in a rainy day fund varies, but generally, it is best to have around three to six months' worth of income saved up just in case an unexpected situation arises.
Are You Risk-Averse?
Are you someone that loves taking chances and enjoys the thrill of high stakes, or do you prefer to take a more cautious approach to your finances? Understanding your comfort zone when it comes to taking financial risks will ensure you choose suitable investments.
Creating an investment portfolio that contains cash, bonds, and stocks can help to ensure the risk is spread. Having a combination of different assets in your portfolio helps it stay balanced and ensures it performs consistently as you are not reliant solely on one asset category.
Investing your money can be an efficient way to make it work harder and provide you with financial security in the future. But, remember investments carry risks, so you will need to decide how much you want to invest and establish your appetite for risk.
This is a contributed post.