Investing is an essential step in achieving financial success. Whether you’re looking to retire comfortably, buy a new house or simply earn some extra money, saving and investing are the cornerstones to a solid financial foundation.
But successful investing takes dedication and commitment. If you’re not mentally and financially ready to start investing, you’re setting yourself up to fail. Here’s a series of signs that will tell you that you’re ready to start investing.
You Have a Plan
Just like you can’t reach your destination in a car without GPS, you can’t reach your financial goals unless you delineate what those are. It’s a great first step to say that you want to save and invest, but your chances of success are much greater if you chart out your course. Write down exactly what you want your money to accomplish so you can define your financial objectives in black and white.
Common reasons people invest are to fund retirement, to save for college expenses and to generate income. Once you know what you want your money to accomplish — and you can certainly have more than one goal at a time — you’ll be better equipped to determine the types of investments that match your objectives.
You’re Out of Debt — or Are at Least Paying It Off
When it comes to achieving your financial goals, debt is a killer. Not only do debt payments drain your cash flow of funds that could be used for savings and investment, the interest rates on consumer debt can be shockingly high. That credit card you use for everyday purchases, for example, may have an interest rate of 20% or higher, meaning your debt would double in less than four years if left unattended. With this type of drag on your finances, it can be hard, if not impossible, to devote meaningful amounts of money toward your investment program.
You Have an Emergency Fund
An emergency fund is the backbone of any successful financial program. With an emergency fund, not only can you avoid drawing from your monthly cash flow to cover unexpected expenses, you can prevent yourself from falling into debt.
If you’ve got a sizable amount of cash set aside for emergencies — experts recommend at least three to six months’ worth of expenses — then you can start dedicating cash to your investment portfolio.
You’ve Done Your Research
Although you should freely absorb as much information as you can about specific investments, you’ll still have to do your own leg work in terms of doing research. There’s no such thing as the right investment for all people, and your own investment objectives and risk tolerance should help guide you to what’s best for you.
Try to tune out all the noise about headline-making stocks that jump 400% in a single week, or whatever the latest investment fad is. Stick to proven, long-term investments with solid returns that match your own personal needs — and you’ll have a leg up over those who are frantically trading in and out of every new idea.
You Have Investable Cash
This might seem like a no-brainer, but you can’t start a successful investment program unless you’ve got some money to put into the markets. All of the planning, hopes and dreams in the world won’t get you anywhere unless you can physically divert some of your cash flow into your investment portfolio.
The good news is it doesn’t take much money to start investing; and, with a little bit of belt tightening, it’s likely that you can scrounge up some funds to get started. Even if it’s only $25, $50 or $100 per month to start, any little bit helps.
For starters, compound interest — which has been dubbed “the eighth wonder of the world” in a quote often attributed to Albert Einstein — can turn even small amounts into decent sums over long periods of time. But perhaps even more important: Investing even a little bit per month can get you in the lifelong habit of diverting money into your long-term investment accounts.
You’re Willing to Make Sacrifices
If you want to build a successful investment portfolio, you’ve got to be willing to make some sacrifices. Although a well-designed portfolio may not need much maintenance, you will have to devote at least some time monthly, quarterly or annually to ensure that your portfolio still matches your needs.
But perhaps the biggest sacrifice will come in terms of delaying current gratification for long-term needs. You’ll have to be willing to divert hundreds or even thousands of dollars from your monthly paycheck toward your investment portfolio rather than spending it on more immediately satisfying things such as vacations, consumer goods and nights out on the town. If you can commit to this type of devotion, then you’re ready to start your investment portfolio.
You Understand Risk
Even the best investors in the world lose money when investing from time to time. This is especially true if you are investing in individual stocks.
Before you invest, you have to be mentally prepared that, even in the best of times, some of your investments just aren’t going to pan out the way you’d like. You also need to fully grasp what losing 10%, 20%, or even more of your portfolio value actually feels like.
It’s easy to fill out a risk questionnaire and say you’d be willing to hold onto your investments if they experience a significant short-term loss, but actually feeling the emotions that go along losing money is something different entirely.
Some brokerage firms offer “paper money” accounts in which you can trade without using real money so you can get the feel for the ups and downs of the investment world. It’s still not quite the same as trading with your own money, but it’s a great way to at least understand what it might be like to lose money.
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