Everyone wants to make more money. However, investment knowledge can help you avoid costly mistakes.
Knowledge can help prioritize your savings so you can avoid certain risks. Below we will explore a checklist of investment tips to help you prepare a strategy (and protect your assets!).
Pay Off Your Existing Debts and Create a Financial Plan
1. Decrease Your Debts
Investing is a way to grow your money, and it lets you afford things in the future that you can today.
Reducing the interest you pay on credit cards and car loans can help ensure you have more cash to invest with. You will also need to create a financial plan with milestones and goals.
In paying down debts, consider the snowball and avalanche methods. The snowball method is where you tackle your biggest debt first (or the one with the highest interest) and pay that off. Then pay the remainder.
The Avalanche Plan is to pay off the smallest bills first (while paying the minimum on your other bills). Then add the money from the paid-off debts to the next biggest bill until you pay that off.
2. Outline Your Financial Goals
While paying your bills off (and paying them down), the next step is deciding how much to invest.
On paper, a computer spreadsheet, or with software (Mint, Credit Karma), outline your goals, how much you want to save for retirement, and how much you want to invest each month.
3. Use Budgeting Software or Hire a Planner
Update this plan regularly with milestones (marriage, new job, home, children). Use software, hire a financial planner, or seek free advice online about what to include in your plan. It is also important to “pay yourself.”
4. Allocate Cash for Things You Enjoy
If you enjoy travel, set aside money for a vacation. Some people use points from their credit cards (before paying them off) for discounted travel (airfare, hotel, rental car).
If you prefer gambling, allocate money to enjoy an occasional gambling excursion. Occasionally playing slots, joining a poker tournament, or sports betting is achievable with an effective money management system.
Maximize Savings, Learn the Financial Terminology and Lower Costs
5. Increase Your Savings
Set up a savings account or 401(k) with automatic deposits. Some employers match contributions, so ask about this.
Budgeting software and budgeting apps can help you view all your bills and finances in a convenient spreadsheet and track your progress regularly.
Savings and investing take time, especially when factoring in dividends and interest. Think long-term (marathon, not a sprint), as reinvesting compound earnings will give you more returns.
6. Reduce Expenses
To help you save aggressively, consider a budget where you can reduce excess spending (moves, fast food, cable channels).
7. Understand Risks
Investments come with risks, and the market is highly volatile (sharp increases and decreases). Hence, it might be tempting to remove your money. However, speak to a financial planner about financial risks, returns, and rewards.
To help outline risk tolerance, compare financial advisors and robo investors, which provide a better return/cost ratio (lower fees, less emotion, no panic selling).
8. Understand Diversification
When diversifying your portfolio, you will put money into different accounts to help balance any subpar returns/losses you receive.
9. Understand Asset Allocation
Asset allocation can also help you distribute your money into different categories (stocks, bonds).
10. Lower Fees
To reduce administrative fees, comparison shop financial planning services and trading/brokerage firms. Use a site like Nerd Wallet or Smart Asset for a broker comparison.
Choose Passive or Active Investing and Give It Time
11. Use an Investment Strategy
You also want a strategy (passive or active investing, growth-, income-, or gains-oriented).
12. Stay Disciplined
Because investing is for the long run, avoid panic from market fluctuations. Investing more in dividend growth or index funds for low-cost and passive strategies.
What is another type of investment if I need help understanding the stock market?
A 401(k) lets you invest as low as 1% of your pay pre-tax, and your employer might match your contributions.
What if I did not start investing in my 20s? Can I start later in life?
Yes! Max out what you contribute to your 401(k) and maximize your savings.
Are stocks risky?
Yes. The market is highly volatile, so speak to a financial advisor about low-risk investments (low probability of losses).
Examples include treasury bills, bonds, notes, inflation-protected securities, fixed annuities, and high-yield savings. Others are CDs, mutual funds, corporate bonds, and dividend aristocrats.
Investing in your future will take research and time. Hence, an effective strategy will help grow your money. Talk to different financial advisors about your goals and look for ways to diversify your portfolio and decrease fees.
After setting up a budget, pay yourself and have goals (vacation, retirement, gaming). These are all ways to build a nest egg and watch your money grow. While it takes time and sounds intimidating, be patient.