Here are seven things you need to know before you start investing. While this list is not a comprehensive one, you need to concern yourself with these areas. While you consider these, think of other areas that you need to address.
- Know your current financial situation. Know your debt level. Calculate your income and expenses by using a budget system of some sort and then consider the following from those results: For some budget, alternatives visit https://kgmeyerpc.com/financial-tools/.
- Mortgage repayments
- Personal tax
- Loans and overdrafts
- Living expenses
- Emergency funds
- Car expenses
- Entertainment
- Holidays
- School fees
- Credit card debts
- Family commitments
Before you start investing your money in any investment products, you should know how much you could spare each month to invest. A general rule is that you should clear your debts first, then save and invest later. That is to say, the more money you put aside now, the better it will be for your future. I would say put aside 10% of your income in your emergency fund. 10% is a small amount that you won’t feel a pinch. Save it until you have managed to build a “fully” funded emergency fund.
- Prepare funds for emergency management. This goes in line with point 1. You need to keep at least three to six months of your income as an emergency fund. After you have managed to do that, then additional money saved can be used to invest.
- Protect yourself and your family first. This means you should have basic life and health insurance that ensures you and your family against terminal diseases and accidents. This is very important as you potentially could lose all your money through investments. If you or your family members need medical attention, it will be well taken care of, and in the event of death, there will be a financial cushion. To find out how much life insurance you may need, go to https://www.nerdwallet.com/blog/insurance/how-much-life-insurance-do-i-need/ to find out more.
- Know your risk level. If you cannot take big risks, short-term investment and swing trading are not for you. And for the record, I am against and do not advise that people invest in the short term or participate in trading as that is not investing. It’s better to invest in low-cost index funds, giving a steady payout and having lower risk. If you are a high-risk or medium-risk taker, you can try to invest in individual stocks, growth, and hedge funds.
- Diversify your investments. Experts would tell you it is a must to diversify your investments as it is that important. Your investments need to have a steady mix of stocks, mutual funds and/or bonds. Though I am not a fan of bonds or bond funds, they may have a legitimate place in your portfolio. Besides that, you should invest in different industry sectors and/or different regions of the world. This will help you minimize your risk as fluctuations in the markets will not have as big an impact on your investments. Your ideal mix will be 10-20% bonds and the rest mutual funds and index funds.
- Do your homework before you invest. It is good to seek the expert advice of a Registered Financial Consultant. But the money is ultimately yours, so you need to do some research and make sound decisions on what to invest, even though your financial advisors might have already worked it out all for you. This is to make sure you know what you are investing and enable you to keep track of them. If your investments suffer losses, you will be able to make the right decision, though if the investment is a solid one, the only action is to do nothing if not add to your position in bear markets.
- Do rebalance yearly to keep your portfolio in line with your risk tolerance and investing goals. Your investment might already be reaping in profits. But it is good to know how well you fare at the end of a period. Reinvest the profits and celebrate if you have success. This will serve as motivation for you and will make you more determined to achieve your financial goals.
