There are many options when it comes to investing money. Some people suffer from a paralysis of analysis precisely because there are so many options. Before starting an investing program, it’s important to take the proper steps to make sure that you know what you’re doing. Here are some steps that you’ll want to take before beginning your investing journey.
Set a Goal
Those who have concrete, measurable goals are more likely to achieve them. According to one famous saying, those who aim at nothing will hit it every time. How much do you need for a down payment on a house? What about a retirement fund or furthering your education? These all come with a price tag, and saving up for them is a worthy goal so that you can reach the needed funds.
Check Up On Your Cash Flow
Cash is good, but cash flow is even better. To see how much you can start investing, you need to know how much you have coming in each month, as well as how much is going out. This is where a paper budget or a budgeting app could come in handy. This is even more important if your income is uneven over the course of a year based upon commission-based pay or overtime. Once you have a goal and a handle on your average cash flow, you can move to step three.
Set Up an Emergency Fund
Perhaps you’ve actually set this up and funded it. If so, great. If not, many financial experts recommend starting with at least $1,000 in a simple savings or money market account. You might shop around to get the best rate, but growing this money is not the main goal. It is intended to take care of emergencies. You should then start building it up to where you have three to six months of expenses set aside for big emergencies like a bout of unemployment.
Analyze Your Tolerance for Risk
You should now get ready to actually make the investments. Your tolerance for risk will dictate how much you put into each bucket. If you’re risk averse, you might want to put more money into bonds or certificates of deposit, as these produce income and tend to have slightly less risk of loss over time. Even if you are risk averse some money in stock funds is a good idea. The broader market has seen high returns over time, and this is the way to make more money.
Review Your Success
Look at your time horizon. How long do you have until your ultimate retirement date or the time that you have as a goal for a big purchase like a home? You can look at your current savings rate and project whether you’re on the right track. These projections will not likely be exact, but they should give you an idea of how you’re doing. Keeping up with your progress on a regular basis is an important step in achieving investment success. You may find you’ll need to increase your savings rate or reallocate your investments. Taking these steps earlier, rather than later, can pay huge dividends in the long run.
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