Six Things To Consider Before Investing
A lot of people have asked me about investing—where to put their money, how much to invest, do they buy stocks, mutual funds, condominiums, etc. They are important issues to address. However, before even thinking about putting your money somewhere, there are a few things that you need to take care of first:
1. Money management—proper management of your finances is the foundation of your quest for wealth. If you are like most of us, your money doesn’t come in just one shot—they come in and go regularly and your investments will do well when you can add to those investments pretty regularly. You can keep on adding to your investments only if you know how to save properly and you can only save properly if you know how to spend properly. Create and stick to your budget, as that will be your most important weapon in building your wealth. If you can’t control your money, making more won’t help.
2. Emergency fund—I cannot emphasize enough the importance of building a buffer fund before investing. Investments are volatile, well at least the good ones are and there is always a danger that when you liquidate your investment, it may have not earned yet or worse, it’s lower than its original amount. The buffer fund will allow you to keep your investment funds untouched since you have another fund to dip your hands into when emergency strikes. A good emergency buffer fund should be three to six months’ worth of expenses. Life will never be devoid of emergencies and, therefore, it is wise to have an emergency fund. Don’t aspire to have an emergency-free life as it is impossible, but you can have an emergency-proof life by having an emergency fund.
3. Life insurance—life risks are part of life and sometimes those risks are beyond emergency funds and life insurance becomes crucial. Consider adequate insurance coverage of about three to five times your annual income and it is also a good idea to add critical condition coverage.
4. Investment objectives and time frame—what are you investing for? Many people invest without really knowing why they do so. Knowing your objectives and time frames will allow you to match the right investment instruments that will be best for you. To a great degree, your objectives should determine the type of investments you should be making. Always match long-term objectives with long-term investments and short-term investments with short-term objectives.
5. Risk tolerance—it is good to determine your risk appetite before jumping into any investment. A lot of people invest money into risky instruments and yet they are not prepared to handle investment risks, which cause a lot of frustration that leads to a lot of stress. Never invest without knowing the risks. Consider your risk preference, but also consider your risk capacity and the necessity for risks—sometimes it may be necessary for you to take more risks than you are comfortable with otherwise you will not hit your goals.
6. Time—think long-term. There are no short cuts to wealth and you need to be patient in building your wealth over time. Do not take short cuts and do not be in a hurry as those actions can cause you to make a lot of financial mistakes. In investing, time is more important than timing. Invest early and do it wisely and regularly.
Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty. —Proverbs 21:5, NLT
Save the date for the most empowering investment conference of the year—#iCON2018 on May 26, 2018 at the Samsung Hall, SM Aura.
Randell Tiongson is a Registered Financial Planner of RFP Philippines. He is one of the most sought-after speakers in Personal Finance and Columnist of Philippine Daily Inquirer and Money Sense Magazine. He is a best selling book author of Personal Finance Step-by-Step Guide.
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