Before You Start Investing, Ask Yourself These 10 Questions
- What is your net worth? do you have any high interest credit card debt? Do you have an emergency fund? What is your worst personal spending habit? What is your big investing goal? Are you comfortable with taking on risk?
- Have you consider an appropriate mix of investments? Do you have a healthy understanding of your investment options? Can your bank handle online banking and automatic transfers with ease? Is your social circle supportive of smart your financial moves?
Feel like you’re almost ready to start investing? While investing is an important step in being financially secure, the thought of what to do before you start investing can be quite daunting.
So, before you can take this crucial step, take some time to ask yourself these questions below. Hopefully, after doing a thorough self-evaluation, investing will feel a bit more manageable.
1. What is your Net Worth?
Your net worth is simply the total value of everything you own. Make a list of everything of value that you own – your car, any balances in your checking account, savings account, any investments, and any real estate. Now make a list of everything you owe – student loans, credit card debt, mortgage, etc. Subtract what you own from what you owe. For example, if you have $10,000 in your bank account, a car you can sell for $15,000 but have $8,000 in student loans, then your net worth would be $17,000.
Focus on this number and think of ways you can make it bigger. Like most people, I used to focus too much on my checking account balance and how much money I had left after my spending.
Before you make any investing decision, sit down and take an honest 360 degree look at your entire financial situation, especially if you’ve never made a financial plan before.
2. Do You Have Any High Interest Credit Card Debt?
If you owe money on high interest credit cards (above 8%), the wisest thing you can do is to pay off the balance in full as quickly as possible.
Trust me, there isn’t an investment that offers anything close to a stable long-term return that beats what you’ll save from paying off your credit cards.
Think of it this way: Making an extra payment on a credit card with a 15% interest rate is basically the same as making an investment that returns 15% per year after taxes. If you pay off $100 of that balance, that’s $15 in interest charges that you don’t have to pay each year until the card is paid off. There is no investment out there that can even come close to that with any consistency.
Not only will paying off high interest credit card debt offer a better return than any investment, paying them off will rapidly improve your net worth and it will improve your monthly cash flow.
3. Do You Have an Emergency Fund?
Like it or not, life sometimes intervenes in the best laid plans. You might have a great investment plan, but what happens if you lose your job? What if you get sick? What if your car breaks down?
The money you set aside for investing should never be money that doubles up as an emergency savings fund. Investment money should be held over a long-term period – think at least five years as a minimum.
You should, therefore, have some savings kept separate which are immediately accessible to pay unexpected bills. You can find the best interest rates using online banks. The easiest way to get started is to set up regular, automatic transfers from your checking account.
4. What is Your Worst Personal Spending Habit?
Before you object, no, I’m not about to ask you to give up avocado toast, or your latte that calms you, or your weekly fitness classes. That would be terrible. Those aren’t the things you should be cutting.
What you should be cutting are the forgettable things, the purchases you won’t remember in a day. The things that are just quietly purchased and quickly forgotten. An extra item tossed in the cart at the grocery store. The digital item bought on a whim, enjoyed once, and then forgot about.
Watch for those things. Be on guard for them. When you see yourself about to thoughtlessly spend money on something that doesn’t really matter, stop yourself. Don’t spend that money.
5. What is Your Big Investing Goal?
One of the key principles of investing is to never invest without a purpose. Reason being that otherwise you can’t really assess your timeframe for investing and how much risk you’re willing to take. Both timeframe and risk are viral questions to ask yourself before you start investing.
For example, the stock market is very volatile with significant short-term risk. You have to be in for the long term for stability. Thus, if you have a short-term goal, investing in the stock market makes little sense. However, if you’re investing for the long term, it can be a great avenue for you.
So, ask yourself, why are you investing? What are you hoping to do with this money?
What’s your goal? Why are you doing this? Figure that out before you invest a dime.
6. Are You Comfortable with Taking on Risk?
All investments involve some degree of risk. If you intend to purchase securities – such as stocks, bonds, or mutual funds – it’s important that you understand before you invest that you could lose some or all of your money. You could lose the amount you’ve invested. That’s true even if you purchase your investments through a bank.
The reward for taking on risk is the potential for a greater investment return. If you have a financial goal with a long time horizon, you are likely to make more money by carefully investing in asset categories with greater risk rather than restricting your investments to assets with less risk.
7. Have You Considered an Appropriate Mix of Investments?
By investing in more than one asset category, you’ll reduce the risk that you’ll lose money. Historically, the returns of the three major asset categories – stocks, bonds, and cash – have not moved up and down at the same time. Meaning that conditions that cause one asset category to do well often cause another asset to have poor returns.
If one asset category’s investment return falls, you’ll be in a position to counteract your losses in that asset category with better investment returns in another asset category.
8. Do You Have a Healthy Understanding of Your Investment Options?
Do you know what different investment options are available to you and how to interpret them? Do you know the basics of what stocks, bonds, mutual funds, ETFs, index funds, precious metals, and real estate are? Do you know how to compare two similar investments to each other? You need those skills before you start investing. If you don’t yet have answers to these questions, don’t worry, that’s what I’m here for.
I also highly recommend picking up an investing book and giving it a good read through before making any investment moves at all.
Have an investment advisor who handles your investing? Good for you! You should still take the time to understand the things that your money is going to be invested in. Simply trusting someone else to handle it is usually a bad move.
9. Can Your Bank Handle Online Banking and Automatic Transfers with Ease?
Before you start investing, your bank should be equipped to make it easy to do online banking and to set up automatic transfers both to and from the bank quite easily.
Why do you need these features? For starters, you’re going to need to make automatic transfers if you want to set up a regular investing plan of any kind. Automation is a big key to investing success – you want your plan to basically run on autopilot.
10. Is Your Social Circle Supportive of Your Smart Financial Moves?
As you switch your mindset to focus on net worth and smart financial moves, you should also keep in mind that you are strongly influenced by your immediate social circle as well. If they’re not committed to those things, it’s going to be substantially harder for you to make those kinds of commitments.
Look at your social circle. Who are the people you see most often? Are those people financially minded? Do they make smart spending choices? Or are they constantly buying new things and talking about their latest purchases?
I’m not saying you should change your friends, but maybe consider joining an investment club. Try looking for an investing club on Meetup.