Investors often put money into stocks, forex, precious metals and real estate among others. Interestingly, the value proposition of investing often encourages many people to jump onboard the investment bandwagon without making adequate preparations.
However, it’s also true that ill-prepared investors often rush out of the markets before their investments have had a chance to mature enough to yield reasonable returns. For instance, investors attempting commodities, forex or CFD trading activities might rush out of potentially profitable trades at the first sign of a dip just because they’re scared of losing their money.
If you’re in a financially-secure position, you’ll find it much easier to invest with a long-term focus. With that in mind, here are four personal finance tests you ought to pass before becoming an investor:
Test 1: Do you have a budget?
Having a budget for your personal finances is the first step towards setting up shop as an investor. A budget helps you allocate your income towards financial obligations, which puts you in a better position to know how much cash you can afford to apply towards investments. Of course, if you’re serious about investing, a budget can help you track and prune your expenses so that you can set aside a reasonable amount for your investments each month. Budgets also protect you from making emotional impulsive decisions to cash out of your investments prematurely.
Test 2: Do you have an emergency savings fund?
Having an emergency savings fund sounds obvious; yet, we can’t overemphasize its importance in helping you succeed as an investor. An emergency savings fund is a stash of money enough to cover your living expenses for at least six months. The presence of an emergency savings fund ensures that you won’t be forced to dip into your investments when you hit a rough patch in your finances — which can damage your investment portfolio.
Test 3: Are you debt free?
Getting out of debt has some obvious advantages such as improving your credit score and helping you to sleep better at night. Interestingly, being debt free can also make it easier for you to succeed in your investment pursuits. To start with, it doesn’t make sense to keep paying credit card debts at 7.5% interest while pursing investments that are yielding 5%. Paying off debt helps you to make smarter investment decisions too. If your net worth is in the black, then you’ll be less likely to jump on long-shot investment opportunities promising huge returns because you won’t be desperate for the returns.
Test 4: Do you have retirement savings?
Many people think that the returns on managed retirement accounts such as 401(k), 403(b) and Roth IRAs is too small and that they can do better managing their retirement fund. If you have the investment experience and expertise, then you might be able to pull it off successfully. However, some people with negligible investment knowledge and experience often think that they can delay saving for retirement because they can always start investing tomorrow and quickly earn a million dollars. It’s in your best interest to calculate how much you’ll need to sustain a decent lifestyle in retirement. After you create a plan for saving towards that target, you can then invest your remaining income to your heart’s content.
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