Investing can be a great way to make money without a whole lot of activity. Every wealthy person on the planet understands how to make their money work for them and not the other way around. However, investing isn’t something you should be entirely passive about. You should never approach it lightly, and it does require a little bit of strategy and education. So, let’s review a few of the things you should do before you invest.
- Build an emergency fund
The first thing to do is to build an emergency fund – money that you put aside for emergencies. It is the money that you can reach out to when needed and pay for those unexpected expenses such loss of a primary job, medical emergency, or personal emergencies.
This emergency fund should be greater than at least three times your monthly expenses. Keep this money aside in a separate account.
- Have a budget and know your cash-flows
If you want to have a healthy financial life, it’s crucial to have a balance between your savings and your expenses. Budgeting your monthly finances and knowing your cash inflow and outflow can help you plan how much you can afford to invest per month.
A simple profit and loss formula that you can use to understand your cash position is revenue — expenses = profit.
Your total revenue is the sum of all the income that you make from different sources, and your total expenses include your rent, groceries, transportation, bills, etc.
When you deduct the total expenses from your net revenue, you will find out how much you save per month or year. After calculating this, you can plan how much to invest in different investment options.
One of the strategies that you can use to figure out how much should you save is the 50/20/30 strategy. You should spend 50% of your monthly income on needs; you should save 20% of your monthly; and the remaining 30% of your monthly income is for the things you want.
- Take a health insurance
Paying a premium plan for ensuring health may seem an unnecessary expenditure when you are young and healthy. However, accidents or health issues may come up anytime unexpectedly, which can put a lot of financial and mental pressure.
Before you start investing, make sure to take health insurance first. Being medically insured can help you avoid facing financial instability in the future and enables you to get the best health treatment.
- Evaluate your risk tolerance profile
Everyone has a different risk tolerance level depending on their age, personality, financial situation, priorities, etc.
If you are young and have a stable job, you might want to invest in ‘high risk, high return’ options. However, as you grow old, you might not have a job or primary source of income, and you might depend on your retirement fund. In this case, you may not be willing to take a higher risk and choose safer investment options.
As different investment options have different degrees of risks, you can choose your investment options depending on your risk tolerance. For instance, if you have a high-risk tolerance, you may invest in stocks, mutual funds, real estate, etc. On the other hand, if you don’t like taking risks, you can choose low-risk investment options like fixed deposits, bonds, etc.
- Define your goals and make plans
One of the most critical things to do before you start investing is to define your investment goals and make plans to reach them. You need to know why you are investing. This will keep you motivated.
By definition, an investment goal is a realistic expectation to meet the returns by investing predefined money for a fixed time frame. The keywords are ‘realistic expectations’ and ‘timeframe’.
Before you put your money in any investment options, set your short-term and long term goals and make plans for how you’re going to achieve them. Once you’ve set your goal, you can choose the best investment options that can help you reach these goals in your defined time-bound.
- Understand the investing basics
Do not start investing your money, if you do not understand the elementary concepts. Make sure that you understand what is meant by stocks, bonds, mutual funds, diversification, liquidity, volatility, and other investing basics. You do not need to become a finance geek or an accountant. However, you should have good enough knowledge of the industry to make intelligent decisions.
- Read the latest news
You should read the latest news related to your potential investments before you invest. A lot of the preparation you’ll be doing will revolve around general strategies and general market research. But when it comes time to invest, you’ll want to know how assets have been performing lately. Once you’re ready to get started, the investment can be a relatively passive process.
If all goes well, you’ll have created an income stream that acts on its own. But it is crucial to do proper preparation before you get started.