You feel well financially and would like to consider investing. Hold your horses! There are a couple of things you need to cater for before starting to invest your hard-earned cash. Although the prospect of making some good money may be too enticing, you need to know what you are doing, otherwise, you are in for disappointment and financial loss. Some people may not be equipped to invest in anything more than a retirement plan, so read on! In this article, we discuss some of the things you need to put in place before you dive in.
Net worth is the key metric
In simple terms, net worth is everything someone owns minus the amount of debt. This includes your house, property owned and other material possessions. In this regard, your investment objective should be about increasing your net worth. There are a number of ways how you can do this. You can save more money, clearing off your debts and stop spending on things you can live well without. You need to have a long-term vision about expanding your net worth, otherwise investing is not for you.
Clear off your debts
As much as possible, you need to clear off your debts before investing. Debts with a high-interest rate should be paid at the earliest and are to be given the highest priority. This can be done by going over and above your monthly repayment and paying your debt in a shorter time span.
Manage your personal spending habits
This is extremely important. Monitor and track your lifestyle expenses and see how you can convert unnecessary expenditure into savings. This could include analysing shopping habits, house expenses and entertainment, which can soak a lot of your money if not managed appropriately.
Before you start investing, you need to ensure you have a safety net in the form of an emergency fund. Just because you are managing well now, you still need to ensure you have sufficient funds in case tragedy strikes. What if you get sick? What if you are made redundant? What if your car needs repair?
Figure out what you really want to achieve in life and ensure that your investment strategy subscribes to your long-term vision
Investing money is a major decision which can impact the family both positively and negatively. You will need to ensure that your spouse is on board with your strategy, otherwise, it can put a lot of emotional and financial strain on the family, especially if things go haywire.
Understand how an investment works
Ensure you are familiar with how an investment works and what are the implications of high risk versus low risk. Start off small to get the hang of things, so if you make mistakes, you will not be heavily impacted.