Before You Begin Investing: Five Things to Consider
Are you ready to begin investing money? This is a very important step in being financially responsible. If you regularly invest a portion of your income, you will eventually become financially independent. The earlier you being, the better off you will be. 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. These are important things to consider before you begin investing.
Are You Financially Fit?
You should check where you are financially. It does not make sense to invest money when you have a lot of debt and no savings on hand for emergencies. By clearing up your debt (especially credit card debt) and saving for emergencies, you will free up more of your cash for investing. Take the time to get out of debt. Ideally, your emergency fund should be 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.
You do not want to pull money that you have been investing; it is important to allow it to grow.
What Are You Going to Do With the Money?
You should also determine what you are planning on doing with the money that you are investing. 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. You may consider a money market account. If you are looking at longer than five years, you can be more aggressive in your investments and you might consider mutual funds and stocks.
If you are planning on using it for early retirement, you will want to invest it outside of a retirement account so that you can access the funds before you are 59 1/2.
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 by leaving your money in a good mutual fund, then you will by moving it between several different stocks right now. While you can make money that way, it takes a solid understanding of the stock market, a lot of time and real talent. You may have someone who wants to do this individual trading for you but proceed with caution. It is too easy to lose it all. You should also consider all of the available options including real estate.
Do You Need a Financial Planner?
You should look for a good financial planner. Your financial planner should understand the goals that you are trying to achieve and should offer you several options on how to achieve them. You should clearly understand the risks associated with each investment before you commit to it. If your financial planner is unable to explain investments, then you should look for a new one. Your financial planner works for you, and so you should not have to argue with him about things. You can find a financial planner through your bank or through referrals.
A financial planner can help you determine how much you need to save and investment in order 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 the specific goals, like a 529 account for college savings or a basic investment account if you want to retire early.
What Options Are Available to Me?
Take advantage of mutual funds that have low initial investment options. Many options allow low initial investments. These are great because it makes it easier for first-time investors. Additionally, some mutual funds allow you to set up a monthly automatic draft to help you avoid the high initial investment. You should carefully consider the operating costs and the average annual return over time. Remember that the funds will go through high and low times and that you need to ride out the low times in order to make money.
It is also important to also consider other ways that you can invest including real estate investments.