Before You Begin Investing: 5 Things to Consider
Are you ready to begin investing? While it's an important step in being financially secure since regularly contributing to your investment portfolio can help you build wealth, it can be daunting.
You may be afraid to invest because you do not understand the market or because you are intimidated by the initial investment options in many mutual funds. While it's always better to begin investing sooner rather than later, there a few things you should consider before you begin building your investment portfolio.
Are You Financially Fit?
You should check where you are from a financial standpoint. It does not make sense to invest money if you have a significant amount of debt and no emergency fund. Additionally, paying off your debt (especially credit card debt) and saving for emergencies, you will free up more of your cash for investing.
Before you begin investing, it's wise to take the time to get out of debt and establish an emergency fund. Worth noting: your emergency fund should be large enough to cover between three to six months of expenses. If your career field is unstable or you are self-employed, you should go with six months to a year of savings.
What Are You Going to Do With the Money?
You should also determine what you are planning on doing with the money that you invest. If you are planning on using it for a down payment on a house or to pay for college, your investment choices will be different than if you plan on using it for retirement.
If you are planning on using it in the next five years, you will be better off by choosing a more conservative account for your money, as opposed to if your financial goals are more long-term, in which case you can choose riskier investments.
For a short-term investment, you may consider a money market account. If you are embracing a more long-term investment strategy, you can be more aggressive with your investments and might consider mutual funds and stocks.
For retirement investments, choose a 401(k), IRA, or other retirement savings account. However, if you are planning on using your investment funds for early retirement, you will want to invest it outside of a retirement account so that you can access the funds without penalty before retirement age.
Do You Understand Your Investment Options?
If this is the first time you are investing money, it is important to realize that you will make more money with a long-term investment strategy than you will if you hope to make a quick buck by day trading or buying and selling securities quickly.
While you can make money that way, it takes a solid understanding of the stock market, a lot of time, and real talent. If this is the investing route you want to take, you may consider hiring a professional. But proceed with caution. It is easy to take a big loss.
Do You Need a Financial Planner?
Before you begin investing, you should first look for a good financial planner or advisor. Your financial planner should understand your financial goals and should offer you several options on how to achieve them. But you shouldn't blindly trust your financial advisor. Be sure you clearly understand the risks associated with each investment before you commit to it. If your financial planner is unable to explain this to you, then you should look for a new one.
If you're not happy with who you hired, you should be able to find a financial planner through your bank or via a referral. A financial planner can help you determine how much you need to save and invest to reach your goals like early retirement or paying for your children's college. He can also help you identify the best type of accounts for specific goals, like a 529 college savings account or a basic investment account if you want to retire early.
What Investment Options Are Available?
If you're just getting started, take advantage of mutual funds that have low initial investment options. These are great because it makes it easier to get started if you don't necessarily have a large amount of money to get started.
Additionally, some mutual funds allow you to set up a monthly automatic draft to help you avoid the high initial investment. However, you should carefully consider the operating costs and the average annual return over time before choosing a mutual fund. Remember that the funds will go through highs and lows, and you need to ride out the low times to make money. It is also important to also consider other ways that you can invest, including real estate investments.
Updated by Rachel Morgan Cautero.