This is the first part of a two-part series on successful investing.
This tip isn’t as much about investing as it is about your financial health, because the first thing you need to do before you can even think about investing is to pay down your debts. It doesn’t make sense to invest in something that will give you a 5% annual return when you have a credit card that’s costing you 27% a year. You need to think about what you’re getting in relation to how much you’re paying.
Interest rates for both savers and borrowers are at an all-time low. If you have a source of borrowing that’s incredibly cheap and you can make more by investing, you’re better off keeping the debt. But you also need to think about your credit score, especially if you don’t have that much of a track record.
Debt and investments are priced according to their risk/reward ratio. If you decide to invest in your friend’s new Fintech startup that’s being run in a basement, you could have bought early shares into what may become the next Apple (which would make you a billionaire over the next few years). But you’re more likely to have bought into a failure and will lose all your money. You’re more likely to lose if you get into riskier investments.
Because government bonds have a slim chance of losing money, they’re very safe places to put your cash. But the returns will be minimal. While it’s important to understand the risk of a particular investment, you also need to understand how much you’re willing to take on. Would you feel comfortable putting all your spare cash into your friend’s new business venture in the hopes of getting a massive payout, or would you prefer the security of a government bond?
Once you have paid down your debts, you should think about where you want to put your money. The best strategy is to split it into three sections: short-term, medium-term, and long-term. You use the short-term money for those unplanned expenses that will occasionally come up. Whether it’s to get your car repaired or to fix your washer and dryer, you need to have some cash that you can dip into when the need arises. Most experts recommend having at least three months’ worth of living expenses, and it needs to be accessible.
Your medium-term cash is what you set aside for larger purchases that you won’t need to make for some time (such as a down payment on a house). This is where your investment strategy can be a little more ambitious because while you may lose money in the short term, you may come out ahead later on.
Everyone needs to have long-term cash, which will typically go toward your retirement. You don’t want to forget about this step because if you’re not careful, you may find yourself retiring with no money. The good news is that because it’s a long-term investment, you don’t have put aside as much every month. The key here, however, is to start as soon as possible.
After you have divided your money into three piles, you don’t want to put all of it in the same place. Make sure you have enough money spread out across a variety of investment areas, because it can reduce your risk. All smart investors diversify their portfolios, and so should you.
While there is such a thing as short-term and medium-term savings, you want to have a long-term financial strategy. Get yourself into a mindset of saving and investing instead of staying in a short-term cycle where you’re always trying to catch up. Developing a financial plan can help considerably with this tip.
In anything you do in life, it’s important to know why you’re doing it. The same is true with investing. You may want to buy a house or a car, but you may also want to start your own business or travel the world. If you have a plan for the money you want to invest, you’ll be more likely to invest it in the right places.
People will always invest in the most popular or the most complicated thing because they believe it’s the best kind of investment, but it may not work out. You want to study the different options before you make a decision. A good rule of thumb is to simply never invest into something you don’t understand.
If you’re looking for more information about how you can become a more successful investor, be sure to get in touch with Trevor Shakiba at Shakiba Capital.
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