So, you have heard about a great investment offer, or you have been told that the path to wealth is through multiple streams of passive income. You have thought about it and are eager to plunge into the world of investing. Before you take any action, please pause, and go through these seven important considerations if you want to be successful.
Audit your personal finances. Before making any investment decision make sure your personal finances are in order. You should be able to know how much comes in by way of salaries, profit from sales or payments for freelance jobs and even cash gifts. Note when this income comes in, is it daily, weekly, quarterly, or monthly? Then make a note of all your expenses, everything you spend money on, nothing should be left out. Pick a fixed period, say monthly, and see the difference between your income and expenses.
Do not invest if you are in debt. After the audit, if you find that your expenses far exceed your income, then you should reconsider investing. Such a scenario means you are in debt and should consider paying off your debt first. Also consider cutting back on a lot of expenses, such that your expenditure does not outweigh your income. From such a position, you can have leftovers that you can put into investing. Money used for investing purposes should only come from your personal savings or payouts from other investments, this is because investing comes with risk. Hence, borrowing to invest, or investing while in debt will lead to losing your funds and ending up in more debt on a worst-case scenario and using gains to service debt on a best-case scenario.
Make sure you have emergency savings. Life is unpredictable, as such you should expect the best but prepare for the worst. There is always a possibility of job loss, a business going south, medical illness or a sudden accident. Having an emergency fund will provide a fallback during such periods. Such a fund should cover at least three months’ living expenses excluding rent. If you live in a rented apartment, then you should have a separate savings account towards it. Note that such funds are safeguards and are not to be used for investment purposes.
Watch thyself! As humas we all have biases. In certain situations, we can be more emotional than rational, and this can be dangerous for investing. Take some time out to understand how you think and make decisions and learn your biases. Do not assume you are immune to external influences, always take the time to critically think and make sure you have imbibed it as a habit to ask for various perspectives from trusted associates.
Do not invest in what you do not understand. There are always those who are looking to take advantage of those with little experience or knowledge. Once they notice you are a newbie, they would peddle complex investment products and claim their complexity is a mark of superior performance. Always keep in mind that the golden rule of investing is do not put your money into what you do not understand. If you cannot explain in a few sentences how an asset works, or how a company makes money, then you should not invest.
Have an investment plan and stick with it. Embarking on investing without planning is as good as gambling. As such, you need a solid investment plan. You can create this plan yourself or get a professional financial advisor. Such a plan would cover your current financial situation and how to sure up cash for investing, your long- and short-term investment goals, your risk appetite, diversification, amongst others.
Invest in yourself. Start investing in yourself before you consider investing in anything else. Investing in yourself is the only investment that has a low risk and a high return. Typically, you invest in yourself by learning about investing. You can do this by reading books or taking professional courses. Increasing your financial intelligence will pay off eventually as you will be equipped to make better financial decisions that avoid pitfalls that lead to financial ruin.
In conclusion, Investing is an activity all should undertake, especially if you have an eye towards financial freedom. As Robert Kiyosaki said, “Don’t work for money; make it work for you.” But investing should not be done without proper thought, planning, allocation of resources and consideration of risk.