Are you ready to invest your money? Allocating your capital across different kinds of investments is essential to building your wealth. Most of us know that working alone will not benefit our financial future significantly. For this reason, it’s crucial to take a portion of your income and develop an investment strategy that is aligned with your life goals. Only then, will you be able to create financial security for you and your loved ones. Investing doesn’t have to be intimidating. Familiarizing yourself with basic principles, will help you make wiser decisions when it comes to growing your capital. Here are five key principles to remember before you decide to invest.
Understand the purpose of your investment
Investing without a purpose is like driving aimlessly with no destination. You waste valuable time and resources. By planning ahead and setting financial goals, you will be able to choose the best investments to help you reach your aspirations. Based on the objective, a different investment option may be required. This will vary depending on whether you’re saving for retirement, a house, your child’s college education, or any other specific financial goal. Short-term goals may require a conservative approach, while long-term ones may allow for a more aggressive strategy.
The sooner you invest, the better
You will probably come across this saying repeatedly throughout the course of your life, but as cliché as it sounds, it’s true. If you can start investing a portion of your income earlier on in your lifetime (think early 20’s), you will do your future self a big favor. A common misconception many have, is thinking they have time before they should start investing. That idea could be farthest from the truth. If you’re young, you should start investing a good 10%-15% of your income, towards retirement. Those who are closer to 50, must consider doubling those numbers if they still wish to retire around 67 (which could be unrealistic for many). The older you are, the more aggressive your investment strategy should be, in order to generate enough capital to live comfortably postetirement. However, investing for the later years of your life, should be a main priority, no matter your age.
Don’t invest money you can’t afford to lose
Every investment involves some level of risk. That’s why it isn’t wise to invest money you need in order to live. Yes, it’s important to set aside capital for wealth creation (and by capital, I’m talking about money, that if it were gone overnight, wouldn’t affect whether, or not, you can pay your bills next month). However, if you’re not financially stable, it may not be the best time to start investing. It is important to save for retirement as early as you can begin to do so, but if you have a high amount of debt, consider paying some of it down before you begin to invest for other goals. Otherwise, you may find yourself retrieving money from your investments, when you should allow it to grow over the course of time instead.
Asses your risk limit
If you do have some funds set aside for investment purposes, understand the maximum amount of risk you are willing to take. As an investor, you need to feel comfortable with your investments, or you may be influenced to make an impulsive decision based on emotions. Finding the right balance is key. You can later adjust your investment strategy as you become more of an advanced investor. This will not only narrow down the best investment options, but also help you sleep better at night.
Spread your wealth
As the saying goes, ‘Never put all of your eggs in one basket’. Once you’ve analyzed your finances and risk level limit, you can begin to choose your investment options. Consider diversifying your investments to minimize the risk and maximize your returns. Include alternative investments, such as limited partnerships, in your strategy. They’re generally lower in risk and yield higher than standard returns. Spreading your capital across different asset classes will help you build up your wealth while creating a strong investment portfolio.