You are tired of working for money. And you have finally decided to slowly accumulate assets and build your wealth. The question now is are you ready to invest? Here are signs that you are ready to invest:
Before you enter the world of investing, there are certain conditions that you must meet first:
1. Pay off all your bad debts first
It is highly recommended that you pay off all debts first, most especially the bad debts, if you have any. It does not make sense to invest and earn when the interest that you are paying for your bad debts is higher than the interest that you are earning from your investments.
So, how to know if a debt is considered good or bad?
A good debt is money that you owe to help you generate income. Examples of good debts are debts used to finance your education, business or real estate for rentals.
A bad debt on the other hand, is a debt used to purchase depreciating assets or things that decline in value over time. Examples of bad debts are consumer loans and credit card debts. You need to get rid of your credit card debt first if you have them because out of all the bad debts, they charge you the highest interest rates.
2. Make sure you have adequate cash in your emergency fund.
You should always have enough cash in your emergency fund. Your emergency fund is money set aside for financial surprises in life such as loss of a job, home improvement, car repair or trip to the dentist. The Rule of thumb is that your savings account should be equal to six months of your monthly expenses. Anything in excess of that, you can use for your investments.
3. Make sure you have adequate insurance.
An insurance is your protection for a possible unpleasant and unexpected event that might or might not happen in the future.Thus, you need your insurance to protect your life and your properties and your ability to earn income.
Here are some insurances available in the market today:
- Health insurance to pay for your medical bills if you get sick
- Life insurance to protect your loved ones just in case something happens to you
- Property insurance for your home and vehicle
- Disability insurance especially if you are the breadwinner
- Travel insurance if you are traveling abroad.
Choose one depending on your needs.
4. Define your financial goals
You need to identify your financial goals or targets. Make them specific and measurable. What are you going to do with the money? When do you need it? How much do you need?
5. Know your investment risk appetite.
Investment risk appetite refers to how much risk you can handle. In investing, the higher the risk, the higher the return. Your emotional tolerance should be able to handle the rise and fall of your investments.
6. Think long term.
Always remember that the purpose of investing is to help you accumulate wealth over time. Long-term investments mean a period of one year or longer. If you are going to be needing the money in a few months time, you are better off just leaving them in your savings account.
7. Understand your investment options.
There are many investment vehicles to choose from. Don’t just jump into investing without having a basic understanding of your chosen investment vehicle. Read a lot and know your options. Choose something that fits your goal, personality and level of involvement. Be careful of investment scams.
If you have satisfied all requirements, then congratulations, you are now ready to make your first investment. Good luck!
First published in Pinoy Smart Living on 12.02.2019.