Before you can decide what you should do with your money, you should first know what you need your money to do for you.
A thoughtful and realistic review of how your funds can work for or against you should come before making impulsive spending or investment decisions.
- You should know what your options are before deciding what to do, so it helps to educate yourself and set some expectations.
- Investing is as much about time, risk, and planning as it is about having money to invest.
- These simple steps can help you get started investing—the most important is never to hesitate to ask for help from a professional.
Read, Study, and Learn
Don't rely on someone else's advice until you've learned the basics. If you don't know much about money right now, one thing you can do is invest in books, quality financial magazines, and investment classes to start learning more.
Read investment books and financial magazines before you invest. For example, do you know the difference between a stock and a bond? If you don’t, you may not be ready to invest.
Set Financial Expectations
Before deciding what to do with your money, check out historical rates of returns for savings accounts, stocks, and bonds. It will give you an idea of what you might expect in good economies and bad ones.
You should also decide on what you're trying to accomplish. Investing to have more money is a great goal, but do you have some financial limitations? Do you need money now or in the future? Are your investments going to be for future income or extra spending money?
You'll need to have reasonable financial expectations of the returns you'll get from the investments you can make.
You can become a millionaire by investing $100 per month for 30 years if you find an investment that returns 6% on average (a very good rate). However, many people don't have that kind of time frame, money, and the ability to make 360 consecutive payments.
Knowing how much you can use, what you want to have, and what you are able to get out of investing is critical.
Know Your Investing Horizon or Time Frame
If you have a short investing time frame, don’t take a risk unless you’re just as willing to lose money as you are to make some. Safe investments are appropriate for short time frames. Growth investments are appropriate only for longer time frames.
If you take a risk and put your money in a growth stock expecting it to double in one year, you need to realize that it is more likely to lose value than gain it.
Decide on Your Investment Risk Tolerance
If earning 10% returns was as easy as picking the right stock, everyone would be doing it. You know there’s no free lunch, so you'll have to take some risks. Safe investments pay low returns because there is less risk, and those returns are available to everyone.
All investments have some risk, and you need to know what that risk is before you commit your money.
Growth investments contain risk; accepting risk is the price you pay to potentially earn a higher return than you could get in a safe investment. Therefore, you should decide whether a lower risk level is more important than higher return potential.
Make an Investment Plan
Instead of rolling the dice with your money, make an investment plan and follow it. Successful investors follow a disciplined process, and they stick with it. An investment plan helps you align the investments you choose with their intended purposes.
You don't need to reinvent the wheel when you're investing—there are many simple plans published in various types of media that have plans that work. The most effective ones involve the steps mentioned here.
Avoid Bad Investments
There are a few simple rules you can follow to steer clear of bad investments and binding decisions. Learn them and use them. Most importantly, if it sounds too good to be true, it is. Some examples of possibly bad investments are those that offer pie-in-the-sky returns for limited risk or investments that are hard to understand or explain to someone.
Most people don’t plan to fail when investing; many fail because they don't create a strategy and a plan to follow it; instead, they jump on stocks that are hyped up by speculators and investing media.
You should cringe when you see “Hot Stocks” or “Best Funds.” Many of the "Best Stocks for [insert month or year here]" articles you find are written by writers trying to earn a living—if they don't have stocks to recommend and write about, they don't earn any money. This is not to say that the writers make bad choices about the stocks they write about, but their choices may not be good for your plan.
If you go and track the returns of these “best of” lists, you'll find most of them haven't done well. Instead, you’ll do better by purchasing an index fund that tracks the performance of a benchmark index that includes hundreds of performing, large market-capacity stocks.
Get Advice When You Need It
Once you’ve followed the steps above, you should have a much better idea of what you should do with your money. There is a ton of information out there that confuses even the brightest investors, so if you don’t understand it all, don't worry. Consider talking to a financial advisor who will talk to you about your goals and objectives and put together an investment plan for you.
A word of caution: When seeking professional advice, asking what you should do with your money is like walking into a pharmacy and asking what kind of medicine to buy. If you don't ask what kind you should get to deal with a specific symptom, you might get cough medicine for your splitting headache.
If someone offers you advice without learning about you, be cautious. They may be suggesting something because that's all they have to sell, not because it is what you need.