Filed under: Investing Basics, Investing
If you’ve accumulated some extra cash, you’d be smart to get it out of the bank and invest it. But if you’re going to take your money plans to the next level, resist the urge rush into putting that money to work. If you act precipitously, you could get sucked up into an investment that earns sub-par returns for many years — or worse, one that loses you a big part of your nest egg.
Here are three steps you can take to reduce the chances of those calamities happening.
1. Take Time to Educate Yourself
You might get wind of a fantastic stock opportunity or hear about a company that has discovered the cure to cancer. It doesn’t matter. Cool your jets. For every genuine “once in a lifetime” opportunity, there are 10,000 duds and scams. It’s hard to tell the difference, and almost impossible to do so if you don’t understand the basics.
Take your time. Learn how stock, bonds and mutual funds work. Block out 30 minutes a day and study for three or four weeks before you make a move. You won’t become an expert that fast, but you’ll have the tools you will need to make informed decisions. It’s a small price to pay for improving your investment performance over a lifetime.
2. Make Sure Each Investment Fits Your Plan
Once you see understand how investments work, it’s time to create your financial plan. Once you do that, you can evaluate each prospective investment on how it helps or hinders your goals. This will make it far easier to make good investment decisions and avoid the temptation of jumping on “hot deals” that come your way. You probably don’t need a fancy or expensive financial plan. All you need to do is:
- Identify your short-term, mid-term and long-term goals.
- Calculate how much each of these goals will cost you.
- Do some reverse-engineering to determine how much money you need to set aside over what period to fund each goal. Then, set up an automatic-investment plan and watch the magic happen.
A little brainstorming will help you come up with good goals. And you can use any number of online calculators to do the math.
As an alternative, you can hire a professional to run your plan. Sometimes this is a smart move. But if you go this route, make sure the adviser doesn’t just sell you a financial plan just to sell his brand of financial schlock investments.
3. Safeguard Your Money From Yourself
Once you’ve created and implemented your plan, you have to make sure you stay on the path. Understand that the biggest risk to your financial success is you — yes, you. Fortunately, there are several things you can do to make sure you don’t sabotage your own success.
- Set up an emergency fund. Just make sure you have the proper amount set aside. The old rule of thumb of having six months expenses set aside is antiquated. You may need a lot less — or a lot more. This depends on your particular situation, earning stability and financial condition.
- Protect your family for an emergency. I’m talking about having an appropriate amount of life insurance so they aren’t thrown under the bus if you are. Fortunately, term life insurance is very inexpensive and is a great fit for most people who want to protect their families against a catastrophe.
- Track and budget your spending. This prevents “surprises” that can sink your plan. I strongly suggest that you think of your monthly investments as an expense rather than a discretionary item. Saving for your future is not a luxury. It is a mandate. And the best way to make sure you fulfill that obligation is to automate monthly investments so the money is put to work before you have a chance to spend it.
It’s not difficult to put this foundation in place before you invest. Get yourself a basic understanding of how investments work and which investments are most appropriate for your specific goals. Then create your plan and fund it every month with automatic investments. For an added measure of safety, make sure to handle the roadblocks that keep many people from reaching their financial destinations. Have an adequate emergency fund set up and get yourself some inexpensive life insurance if you need it.
You don’t have to do any of this perfectly. You’ll learn as you go. There is nothing wrong with that. But you do need to get started. What’s stopping you?
Neal Frankle is an independent certified financial planner and editor for WealthPilgrim.com and MCMHA.org.
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Source: Investing