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Do you have an emergency fund? If so how long is it expected to last? This is important because you never know what unexpected circumstances can pop up.  A flat tire or blown water heater out the blue can wreck havoc on your finances.  Once you begin investing some investments will have fees associated with taking funds out early.  So it is best practice not to view your invested funds as readily available cash.  

How much can you comfortably afford to put in investments?  Take a realistic look at your income and expenses to determine what your disposable income is.  From the amount of disposable income pick a reasonable amount to invest.

How much money are you comfortable losing?  Really consider this question.  Investing involves lots of different risks.  It is likely you will lose some money investing, especially at the beginning.  So if based on your comfort you would be ok losing $2,500, do not go and invest $5,000.  You have to be conscious at all times that the money you put into an investment can drastically lose value.

You may get the highest return by paying off debt.  If you are in debt you would have to make a substantial amount on your investments for it to be worth not paying off your debt sooner.  Lets say you have a credit card, which most likely you do, and that card has a high revolving balance.  At what point does it make sense to put money into investing as opposed to paying down the card sooner.  I looked at bankrate.com to see what the average rate was for a low interest credit card, and that rate was 11.62%.  So if your investment will give you a return of 8.5% you would achieve a higher return by paying off the debt.  However, if your investment were to provide a 15% return then its worth it because you have enough to pay the debt, and money left over.

Are you contributing to a 401k or workplace retirement plan?  If you are not contributing to a retirement account what is holding you back?  Putting money in your 401k or workplace account has a lot of advantages.  In general the money goes in pretax so it does lower your current income.  You can also make larger contributions to these tax advantaged accounts.  Which means that you pay taxes on contributions and earnings when you withdraw the money.  Some employers even offer matching contributions to workplace plans, which equates to free money for you.

Are you taking advantage of the company match?  If you do not take advantage of the company match you are hurting your chances of being successful in retirement.  Putting money into a workplace plan like a 401k is one of the best moves you can make as an investor.  The money comes straight out of your check so you do not have time to miss it.  I have seen some companies offer company matches as high as 7%, and it could be higher at other companies.  Of course you can go above the company match, but just by doing the full match you are doubling your investment amount at half the cost to you.

Be aware of low cost trading.  It is good to have access to cheaper trades, but if used wrong can erode profits from excess trades.  Lots of new investors forget to factor in the cost of commissions when making decisions on what to buy or sale.  Where the loss can really show up is if the investment has gone down in value since purchase, it gets further lowered by the cost of trading (commission paid).

Investing purpose, and what you hope to accomplish as an investor.  By having a goal in mind it is more likely that you will accomplish it, and it lets you know if your plan is on track.  Examples of investment purpose include: saving for retirement, saving for education, or generating a higher return than leaving money in cash.  

Are you prepared to be consistent in your efforts.  When you start to invest its like you enter in a sort of relationship that must be nurtured.  Your investments will take time, money, and consideration from you to grow.

  
Think before accepting random specific advise.  Sometimes people genuinely mean to be helpful when they offer advise.  But you must take specific advice into consideration based on how it will apply to you.

Understand that you can take on more than enough risk and less than enough risk.  As an investor it is important to get a grasp of what your risk tolerance will be.  By risk tolerance I mean you willingness to accept certain levels of risk in order to generate a return.  The higher the risk the greater the potential return.  If you take on very little risk you run into a situation where your investments may have limited growth, and by taking on too much risk you run the chance of losing more than you may be comfortable with.

Knowing what you know about yourself do you trust yourself to manage your money?  Seriously though, you know you.  You know your shortcomings with money, your ability to plan, and whether you have an interest in being a master in the realm of investing.  Based on what you know, do you trust yourself to manage your money.  If the answer is no, it is ok to seek help.

 


Comments

09/14/2015 9:34pm

Love this post very insightful and true. Thanks for sharing!

Investing Dollars and Cents
09/15/2015 6:44pm

Hey Candice, glad you enjoyed this.


Comments are closed.