The prospect of making lots of money through investments is enticing, especially with strong performances on the stock market. But before you start investing, it’s best that your finances are in order.
It’s not a good idea to start investing money when you find it difficult to pay the monthly bills. Don’t plan on investments in dreams to pull you out of debt. Instead, focus on your spending pattern until you are spending less than your income.
On the other hand, saving money for the future is important for young adults and those planning for retirement.
Here are five steps to consider before you start investing:
- Set goals — Figure out why you are investing and your needs to know how much you want to save or how much risk you can handle. You could have several goals. Building for retirement might involve a tax-deferred IRA or work-related 401(k) account. Investment strategies depend on your age or position in life, according to Investopedia. Younger investors could afford some risky investments along with secure measures while older investors might concentrate on safe investments.
- Pay down debts — Prioritize paying off high-interest debts. Extra payments on a credit card decreases interest charges to increase your cash flow, notes The Simple Dollar. It can equal the return on an investment. Paying off a student loan depends on each person’s situation. You might be able to earn high enough returns from investments that are more than the interest on a loan. However, paying off a student loan faster could enable you to invest more money later.
- Build an emergency fund — You might want anywhere from three to nine months of emergency money on hand. The fund can be used in case of job loss, illness, or car problems. Unexpected debts may occur throughout life.
- Plan to invest a certain percentage of your income regularly — Commit to a specific amount each month for your investments and maintain it. For a retirement savings plan, financial planners recommend at least 10 percent of your income or even 15 percent if affordable. Workers able to participate in an employer matching savings plan, could invest as low as five percent while the employer pitches in another five percent. As your income increases, you could go to 20 percent for retirement or more aggressive investing.
- Find a financial adviser — Financial planners are available through brokerage firms, banks, or other financial institutions. They key is finding one trustworthy and able to understand your needs. Talk to an adviser about your financial situation and your risk tolerance. Ask friends, neighbors, or co-workers about an adviser they have chosen. Consider the reputation and performance of the adviser’s firm.
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