We’re all familiar with the word “investing,” but are we all in tune with the reasons behind investing that make it so popular?
A few of the benefits of proper investing include being able to comfortably float through your golden years financially, be able to quit working early, delay paying taxes until later, and cut down on your taxable income.
Everybody hopes to be in a good enough financial position to safely invest their career’s earnings. Even if you’re able to pay off all of your debts and comfortably put money back in the form of investments, you should first consider these things before embarking on your journey as an investor.
What’s Your Purpose in Investing?
First, you need to think about what your reasons for investing are.
Assume you make $100,000 each year and only spend $40,000. After 40 years of work, all the while generating an annual disposable income of at least $60,000 that you will undoubtedly save, you can afford to lose quite a bit of money and still make it through retirement smoothly.
What if you only have 10 years of working ahead of you at a disposable income of just $10,000 per year? You need to be much safer with the money you save.
The former situation opens itself up to take on risk comfortably. Someone in the latter situation needs to be much, much more careful.
Different investments have various risk-to-return ratios. You need to think about whether you want to play it safe, whether you can afford to play it safe, and what you’ll actually do before investing.
You Need an Emergency Fund
Assume all the money-earners in your household lose their job tomorrow. Do you have enough money to cover the next three, six, or 12 months’ expenses?
Your household should save up enough money to cover at least three months’ expenses before investing a penny in case of an emergency.
Don’t Be an Active Investor
Active investors regularly trade their investments based on short-term performance and market trends. This is a bad idea. Very, very few people make money as active investors for a number of reasons, including people’s cognitive biases getting in the way.