The following is a guest post. Enjoy!
Once you start feeling a strong desire to be a good steward of your money, that’s a sign that you’re ready to invest. But before you start, you need to understand that investing is a risk you must be willing to take, and a necessary one if you have long-term goals. Once you feel that need to invest, avoid doing it blindly and instead watch out for the following signs that you’re ready:
1. You Have Cleared All Your High-Interest Debts
Investing in stocks gives you higher refunds, around 7%-8%, making it a worthwhile investment over time. It’s also nowhere near the interest charged on high-interest loans such as car titles, payday loans, and credit card loans. Sometimes, these loans have ARPs amounting up to 300%, which is way more than what you save.
It makes sense to pay these loans before you start investing in the stock market. When investing in the stock market, check the stock analyst ratings to help you make an informed choice.
2. You Have Emergency Funds Set Aside
The stock market is a good investment plan as it fetches you good returns in the long run. That means that if you have some money stashed somewhere, and you plan on using it in the next five years or less, then you shouldn’t put it into stock.
Instead, make sure that you have an emergency fund set aside to cater for anything that might come up within the next five years without getting into debt. The funds should cater to your daily expenses for the next three to six months. Saving that much money may take you a while, especially if you have little income. In that case, you can start by saving a little, about $1,000 to $2,500, and build it over time, while at the same time contributing to your long-term investment.
3. Your Cost of Living is Lower Than Your Earnings
If you’re making enough money to foot all your bills and still manage to save, you’re ready to start investing. You can increase your earnings by getting part-time gigs. The most important thing is to make sure you’re chipping in something to both your savings account and your long-term investments.
4. You Have Your Goals Clearly Outlined
Investing in long-term projects is a wise idea, but you need to ask yourself why you want to invest before you do it. Also, make sure that you have the money you plan to spend within the next five years. You should never invest that money in the stock market.
The stock market is quite unpredictable, and it’s possible to buy stocks at a fair amount this year hoping that the price will go up, only for it to drop. If you need to use the invested cash in such a short time, then you might end up incurring losses based on the current stock market conditions. That’s why it’s crucial to view the stock market as a long-term investment plan.
5. You Understand What Asset Allocation Means
While investing is a smart move, you must do it wisely. Before starting, you need to consider various factors, including:
- Your goals
- Time horizon
- Risk tolerance
- The type of investment to undertake
The above factors help you determine the best way to invest your money, with some of the best options being:
- Precious metals
- Real estate
- Stocks—both in the U.S. and international markets
You can purchase stocks through index funds, exchange-traded funds, or mutual funds. If you’re not sure how much to allocate various asset investments, subtract your age from 110. The number you get should be the percentage to invest in the stock market while the rest should go to fixed-income investments.
Bottom Line
When making your investment, it’s essential to understand that investment is a journey and requires direction. You can define which path to take by having a clear goal on why you want to invest in the first place. For instance, you may decide to invest in having a happy retirement or securing your kid’s future. Whichever goal you choose, be sure to stick to it and you will succeed in long-term investing.
