Investing is one of the widely used strategies to build wealth. The great news is there are various vehicles out there that you can choose from even with small money put away. The income you get from such long-term commitment comes in different forms such as appreciation of asset value, interest earnings, or financial profit. But keep in mind that this technique, in order to get great returns, requires a lot of patience.
And while investments come with such amazing rewards, there are also some potential risks to consider. If you’re just a beginner in investing, here are some tips to help you minimize certain risks.
1. Pay off all your debt first
If you currently have high-interest debts, let’s say around 8%, finish them off before putting your money elsewhere. There’s no investment out there that could compete with the amount of money you’ll save from paying off your debts.
Plus, it gives you peace of mind and flexibility to save and invest your money in any way you want without being held back by finance charges or interest payments. Apart from allowing you to invest more money, getting rid of your debts will have a positive impact on your net worth and improve your monthly cash flow.
2. Build a cash emergency fund
Let’s be real, even if we’ve laid out our best plans, life happens. What if your startup needs immediate funds for unexpected costs? What if your car breaks down? Or, you lose your job? In such times, most individuals tend to use their credit cards to cover the costs. However, take note that banks can quickly cancel your cards if they see you’re having trouble with your finances.
Prevent burying yourself in a deeper financial grave by having a healthy cash emergency fund. You can keep it on a high-yield savings account or any type of account with a great interest rate and easy access.
3. Lay your financial roadmap
Whether you’re a novice or experienced investor, a financial roadmap is necessary before making any investment decision. Having clarity about your financial resources and goals is important for protecting your assets. These financial plans or roadmaps can help align your expectations by providing you with a long-term view. It is primarily beneficial for evaluating incomes and assets, guaranteeing that your savings, expenditures, and insurance won’t be affected by your next investment.
In creating your financial roadmap, you need to first determine your financial goals and position. And whether you’re investing for your business or personal, you’ll need to get your finances on track first before you invest. The last thing you want to do is to withdraw your money too early and not get anything in return.
4. Know your risk tolerance
Any investment vehicle comes with either low, moderate, or higher risk. With that in mind, it’s important to know your risk tolerance, which describes your ability to withstand the loss of investment. Risk tolerance is identified by a combination of factors, including your investment goals, personal comfort level, investing timeline, age and life stage, and other financial resources. Knowing your risk tolerance allows you to be more careful and make smarter investment decisions.
In risk tolerance, investors are classified into three main categories: conservative, moderate, and aggressive. Conservative investors focus on making gains and avoid losses by not indulging in risky vehicles. People in the moderate category tend to balance their investments between safe and risky asset classes. Lastly, investors who prefer investments with dynamic returns and are comfortable even on risky ventures are classified as aggressive.
5. Seek the assistance of the right expert
If you’re a new investor, it’s normal to be confused about choosing the right type of investment that suits your lifestyle. Talking to an investment specialist or financial advisor can help you make smarter decisions. But keep in mind that it’s always better to hire a person who specializes in the type of investment or service you need.
For example, if you’re setting up a defined contribution pension scheme or retirement plan in your business, it only makes sense to talk to a person with experience in such a retirement plan and readily know the investment risks involved in it. If you’re looking to go for personal investments first, find someone who specializes in stocks or property investments.
Investment vehicles are definitely a great place to place and grow your money if you do it right. Whether you’re planning to earn more money for your retirement fund or any personal big purchase, investing would be a good strategy. Take note of these tips and you’re good to go.