Before you begin investing, it’s wise to take the time to get out of debt and establish an emergency fund. Worth noting: your emergency fund should be large enough to cover between three to six months of expenses. If your career field is unstable or you are self-employed, you should go with six months to a year of savings.
It’s always better to begin investing sooner rather than later, there a few things you should consider before you start investing money. 6 Things to do now before you start investing.
1: Pay Off Bad Debt and Avoid Money Traps
These things shouldn’t hold you back from starting to invest, but if you have “bad” debt from credit cards, pay that off before you put money in the stock market. high interest rate debt, pay that off before you put money in the stock market. That interest rate can be more than any gains you have on your investments so do this first.
Speaking of trouble, don’t fall into the common money traps. People of all ages are trying to keep up with the “Joneses” by buying thing they don’t need: the latest phone, shiniest car, biggest house, you name it.
2: Create an Emergency Fund
If you have figured out how to spend your money wisely, you have probably figured out how to save it. It’s a good idea to put 3-6 months of your living expenses into your emergency fund (it can just be in a savings account) should something crazy happen, an emergency fund will also come in handy in case of a recession. Even if you don’t have to reach for it, you will have peace of mind knowing there is a cushion available if you need it.
3: Learn the Investing Basics
You wouldn’t jump in the ring without knowing the basics of boxing, you shouldn’t jump in the stock market without knowing the basics of investing for beginners.
Before you begin building wealth, it’s important to understand the basic goal of investing as well as the process that you will use to reach that goal. At the most basic level, investing is all about buying $10 worth of value for $5; when you are able to buy a company for less than its true value, the value of your investment will grow over time – this is the ultimate goal of investing. Read Smart Investing for Beginners
4: Create an Investment Plan
Once you know you have a solid foundation on how investing works, you can move on to the next steps, but don’t get your wallet ready just yet. Before you put your money in the market, you need to have a clear plan of what you want to accomplish and how you are going to do it. This is where creating an investment plan comes in.
The best investment plan is one that is customized to your lifestyle, I’ll walk you through the steps necessary to create an individualized strategy that will set you on the path to success.
- Evaluate your current financial standing to understand how much risk you can take.
- Determine your goals and how long it will take you to realistically achieve them.
- Figure out which types of investments and strategies are the best way to get you to where you want to be.
Having a clear investment plan will give you a ton of clarity as you begin investing.
5: Decide What Type of Investment to Make
Next, you need to decide what type of investments will help you accomplish what you have set out to accomplish.
Investing in Stocks For Beginners
When you purchase an individual stock, you become a partial owner of the company whose stock you purchased. That means when the company makes money, so do you, and when the company grows in value, the value of your stocks grows.
Since investing in stocks allows you to profit from owning any publicly traded company, it’s the most rewarding investment option.
On average, the entire stock market grows at a rate of about 7% a year, but it is possible to achieve much higher returns by investing in hand-selected individual companies.
Investing in Bonds for Beginners
Bonds can be purchased from the US government or from individual companies. Rather than buying ownership in a company, bonds essentially allow you to “loan” money to the government or to a company in exchange for modest returns. On average, bonds offer a return of 2%-3% per year.
Those returns aren’t great, especially if you’re getting close to retirement and don’t have 40 years to grow your money. On the other hand, if you are getting close to retirement, maybe you want safe investments making bonds right for you.
Investing in Investment Funds for Beginners
Investment funds are a basket of stocks that are overseen by a fund manager. While these funds are built and managed by so-called “financial experts”, they typically have a hard time beating the market when you factor in the fees that fund managers charge to those who invest in their fund.
6: Establish Your Investing Strategy
If you’re doing it right, there’s a real strategy involved. Now, you can search the web and find a lot of strategies for investing beginners out there. These investment strategies include:
- Impact Investing: Investing in companies with a measurable environmental or charitable impact
- Growth Investing: Investing in companies that exhibit signs of above-average growth
- Income Investing: Investing in securities that pay dividends
- Small-Cap Investing: Investing in small companies that are new and potentially grow faster
- Value Investing: Investing in great companies when they are on sale for prices lower than they are worth
When you invest in this way you can still buy growth companies, small-cap companies, and impactful companies, but you buy them when they are on sale.
This is the only kind of investing that will give you the highest rates of return with the lowest amount of risk. When you buy wonderful high-value companies for half or even a quarter of their value then hold them long term you can see long term value. If you want to be active you can buy and sell, but it’s best to do that in an IRA where you aren’t hurting from the taxes.
Do Your Research – The best companies to invest in for beginners are companies that have been around for at least ten years, companies that you understand, companies that exhibit past growth and the potential for future growth, companies that are run by trustworthy management, and companies that have been placed on-sale relative to their value.
If you find a company that meets these qualifications, you will have found an ideal investment for any investor, beginners included. If you find a company that meets all of these qualifications, you will likely have found an ideal investment opportunity.
Practice Patience and Wait – Once you have found a company that meets your qualifications, it still may not be prudent to invest in it right away. Instead, you’ll want to put the company on your watchlist and wait until the stock market places it on sale.
The good news is that the market puts wonderful companies on sale all the time. If you’re patient, the companies on your watchlist will eventually dip to a price that allows you to buy them up for a bargain rate and profit once the price of those companies goes back up to their true value. Subscribe for more investing, financial, business and sales posts. Have a lovely day.
