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5 Things You Must Know Before You Start Investing

27 April 2022

Starting to invest can be daunting if you don’t have any guidance or experience. Understanding how each investment opportunity works, your personal financial goals, risk tolerance, and budgeting skills are all essential factors when making an investment decision. The decisions you make today can have a major impact on your financial future so it’s essential to get them right. Don’t lose sight of who you are and why you’re investing in the first place.

To invest is to put something at risk (money, time, effort, and so on) with the promise of a greater payoff or benefit in the future. Of course, it can be scary to start investing for the first time. You might fret over small mistakes in your strategy, fear losing your investment, feel overwhelmed by all of the options, or be confused about what to know before you start investing. But don’t worry; you don’t have to face these challenges alone. Here are 5 important things that you must know before you dive into investing. They will make all the difference in your wealth-building efforts, so take a few minutes to read over this advice and get started with a firmer financial footing.

Where do you stand financially?

It’s important to know your financial position before investing. This way, you are able to decide if you can afford the ups and downs of the market. It helps you to determine the amount of risk that is appropriate based on your investment goals, situation, tolerance for risk, and overall understanding of the effects of investment decisions on your total wealth.

Start by assessing your savings, available credit, and budget to determine how much you can invest. You should also make sure that you have a reasonable expectation of when you’ll need the invested capital, especially if it’s short-term or long-term. 

Why do You want to start investing?

When you’re investing, there are three factors that shape your portfolio: 

  • Financial Goals
  • Investment Horizon
  • Risk Tolerance

Before you start investing, make sure you know why you are getting into it. This will help you pinpoint your investment goals and construct an investment strategy that aligns with them. It is important to know if this is just a hobby or if you’re going to need income from your investments at some point, such as in retirement. Then, once you have determined a range of time, identify the risk level that will meet your investment horizon. Your investment horizon is the amount of time you’re willing to keep your investments until you need access to your money. When thinking about risk tolerance, check your risk profile before you start investing. It is important to think about how much market volatility causes you to become stressed out. Having too much market volatility means high-risk tolerance. On the other hand, not having enough volatility means low-risk tolerance. Once you have addressed these questions, then it’s time to put your money to good use!

Different investment avenues

There are a lot of options to start an investment in, but it all depends on the person and their choice. You can start investing in the stock market but watch out for things to know before investing in stocks. In markets, your goal should be to sell at a higher price than what you bought it for, so it can be a great profit if you do so. 

In order to invest in stock markets, we need some tools like share market, stock or currency trading software or app, etc. If you are buying a company’s shares and expecting them to increase in value, you are buying equity. If you are buying gold or silver with the intention of reselling it later at a higher price, you are dealing in commodities.

Importance of an emergency fund

An emergency fund is what it sounds like: money set aside for sudden financial burdens— anything from a death in the family, to a broken water heater, or an unforeseen trip to the doctor. An emergency fund will help minimize financial strain and prevent you from taking on debt. Having at least three months’ expenses in cash is recommended. The best way to do this is to set up a direct deposit and save a small percentage of your income every week into your emergency fund. Set up automatic deposits so that you don’t even have to think about it, and your savings will grow while staying out of sight.

A solid financial plan begins with an emergency fund. It is always advised to have three to six months of your regular expenses set aside in case you face a major life change such as losing a job or being unable to work for an extended period of time. 

Debt Levels

Debt levels – and how you deal with them – will matter a great deal as you start investing. So it’s vital that you’re able to clear any debts before you start investing, so your finances aren’t weighed down with fixed interest rates eating up your money. Regarding debt management, work out whether it’s worth consolidating your debt into one product to make it easier to manage.

High debt levels can cripple your ability to save in the future. You can opt for getting loans that need to be given very little or no collateral, but of course, it depends on the interest rate and repayment terms offered.

Conclusion

Before you start investing, the first thing to do is to assess your financial situation. There are some things you should consider, including your risk tolerance, financial goals, and how much you’re willing to invest in stocks. Don’t make decisions in a hurry. Be smart and learn more about investing so it doesn’t turn out to be a big mistake that could cause serious consequences in your life.

In short, you should start investing only if you are willing to commit the time and the effort required to learn how to pick stocks wisely. Remember that past returns are not a guarantee of future performance, so don’t allow anyone’s great year to drive your expectations unrealistically high. That said, just because your financial adviser may not be willing to teach you every single thing there is to know about investing doesn’t mean you’re not capable. So do what’s right for you and make sure that whatever strategy you choose is adequately supported by your investment goals and personal circumstances.

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