4 Questions To Ask Yourself Before Investing
Figuring out if you’re ready to start investing isn’t always cut and dry. While you may have what appears to be disposable income available that you can put to work. There are other factors that you need to consider as well. Even if getting started sooner rather than later is usually a good move. There are a few questions you need to ask yourself before you begin. If you are trying to figure out whether now is the time to start investing, here are four questions you need to ask yourself.
1. Am I Financially Fit?
Investing isn’t something you should take on if other aspects of your financial house are not in order. Have you conquered all of your high-interest debt? Do you have an emergency fund that can cover your expenses for three to six months? Is your retirement account healthy? Can you live your chosen lifestyle and stay within budget with room to spare?
If you can honestly answer “yes” to the questions above, you may be financially fit. At that point, investing your surplus income could be a smart move, allowing your money to potentially grow faster than it would in another savings vehicle.
However, if your answer is “no,” then you might want to focus on a few other areas before you start investing. Pay off your high-interest debts (like credit cards, payday loans, and some personal loans) first. Since the interest rates are usually higher than what you can earn by investing your money, it is wiser to put the cash toward paying off those debts.
Similarly, having a robust emergency fund and retirement account gives you financial stability. Being able to live well within your means is also a sign of financial health, so it should also be a priority.
2. What Are Your Goals for the Money?
Since an investment account isn’t automatically tied to a particular goal, like saving for retirement or an emergency, you need to figure out what financial objectives the funds will support. For example, are you hoping to buy a home in cash? Do you want the ability to retire early? Are you saving for your or your child’s education?
The goal you have helps determine your timeline for building up the money. By understanding your objectives, you can select investment options that align with your plan.
3. Are You Risk Averse?
Investing comes with risk, period. There is no sure thing when it comes to the stock market or most investment options, so any money you put in could disappear.
However, certain approaches carry less risk than others. For example, index funds and mutual funds automatically come with a level of diversification. This can help your account maintain or grow in value if a single company or sector experiences a decline, essentially being balanced out (or more) by areas that are stronger.
If you are hoping to increase the value of your investments in a substantial manner quickly, then you will have to take on higher risk options. As a result, you are also increasing your odds of losing money, as a high-risk investment might be just as likely to take a tumble as it is to thrive.
Understanding how much risk you are comfortable with is also critical for planning. You can then choose investments that fall within your comfort zone, ensuring you have the highest earnings potential possible without experiencing undue levels of anxiety about your choices.
4. Do You Understand All of Your Investment Options?
Investing is an incredibly broad category. When most people think of investing, they focus on stocks from individual companies. However, there are alternatives, such as ETFs, mutual funds, index funds, real estate, precious metals, cryptocurrencies, and many more. If you don’t have a solid understanding of what you can invest in, it is better to learn about it before you start.
Similarly, gaining knowledge about the various services you may need to use to invest is also critical. For example, you might need to compare brokerages to make sure they work with the kinds of investments you want to make. Additionally, you need to examine their fee structures and various costs to determine which one is the best deal and consider their reputation to make sure they are reliable.
In some cases, you may even want to explore working with a financial planner. While these services come with a cost, these professionals can help you understand your options and assist you in designing an approach that aligns with your goals and risk tolerance.
Before Investing Ask Yourself
Ultimately, all of the questions above are important to ask yourself before you start investing. Otherwise, you might make decisions that aren’t ideal, harming your ability to make your money work for you and reach your goals.
What questions did you ask yourself before you started investing? Share them in the comments below.
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