So you’ve decided to start investing. Excellent. Investing is hands-down the best way to take the money you earn and use it to make more money, build wealth and finance an excellent future.
Before you begin investing however there are quite a few important questions that you need to answer, not the least of which is what type of investing you want to engage in. There are stocks of course, as well as bonds and mutual funds. You can also invest in an educational IRA or the 401(k) that your employer offers, or purchase an annuity.
You also need to keep in mind that, no matter what type of investment and investing plan you engage in, all of them come with a certain degree of risk. For example, the federal government doesn’t insure securities, even if you happen to purchase them through your bank or through a credit union, and if they lose money or fail you lose money.
With these things in mind, the following questions should all be answered, either by research that you perform or by a financial expert you consult with, before you begin investing. Enjoy.
What are your investing goals?
Are you investing to save money so that you can purchase a house? How about to finance your retirement? Whether you need money to pay for college for your children or create a “cushion” of money for when financial emergencies arise, you need to know as specifically as possible what your goals are before you begin investing.
How much time will pass before you get your invested money back?
If you purchase stocks, shares in mutual funds or bonds, you can sell them at any time. Of course, there’s no guarantee that you’ll get back the same amount of money that you paid for them, and you might just get back less. Other types of investments actually restrict you from getting your cash back for specific periods of time, including things like limited partnerships.
How much money can you earn on your investments?
When you purchase a bond you generally get a fixed amount of money in return. With securities however your earnings go up and down along with the market. Stocks do the same and, even though they might have done well before, most investments don’t comes with a guarantee of future earnings.
What is the risk involved in your investment?
As we mentioned earlier, investing is inherently risky. The risk is simply that the money you used to invest won’t be paid back to you, or the earnings that you thought you would make won’t come to fruition. There’s also a trade-off that you have to make; most investments with a higher potential for earnings have a higher risk, and vice versa.
Are you prepared to diversify your investments?
This one is relatively simple; if you have several different types of investments the chance that you’ll suffer a complete financial loss will be much lower than if you invest in only one or two. In other words, by placing your money in a number of different investments, your risk is greatly reduced.
What are the tax advantages of your particular investments?
Some investments have better tax advantages than others. For example, if you purchase US Savings Bonds, you won’t have to pay state and local taxes. Municipal bonds are the same, IRAs have tax advantages and Roth IRAs do too, but they’re a bit different. There are other tax-deferred investments that you can get for things like college and retirement as well, some of which let you postpone paying taxes and some of which eliminate them completely.