Everyone with the means should consider investing. It is an effective way to put your money to work to preserve your wealth, augment your income, beat inflation and preserve the value of your money, or build your wealth for future big-time expenses such as retirement.
But investing can be confusing and intimidating for beginners and even those who have made set aside their money in financial services companies such as banks and government investment facilities such as mandatory pension funds.
Nevertheless, regardless if you are a beginner or are planning to grow your investments further, your journey to financial wellness should always start with asking the right questions. This article lists and explains the major questions to ask before you invest.
5 Important Questions To Ask Before You Invest
1. Are you ready to invest?
It is important to highlight the fact that you need to have the necessary safeguards before you start investing.
These include having an emergency fund just in case you got laid off from work, health insurance for unforeseen medical expenses, life insurance coverage that include income protection due to disablement and hospitalization, and other insurances such as home insurance and car insurance, among others.
It is fruitless to invest and grow your money if you do not have the aforementioned safeguards. Unanticipated expenses can drain your savings and force you to liquidate whatever investments you have. Risk management is the foundation of personal finance.
2. What is your purpose For investing?
You should know why you are investing. Answering this requires answering more specific questions. Specifically, you should define your financial goals and objectives.
Some people invest for extra income. Others are building funds to buy their dream car, start a business, or have enough money for a down payment on a house. People also invest to prepare for bigger expenses in the future such as sending their children to college or having enough funds that will last them through their retirement years.
Your financial goals and objectives can be multifold. What is important is that you know your purpose in investing. And once you are able to determine this purpose, you should then ask yourself, “Will this investment help me achieve my goals and objectives?”
Goals and objectives should have a deadline. Hence, part of determining your purpose in investing is determining your investment timeframe. You should also ask yourself: “How long do I plan to invest?” “When should I reap the benefits of my investment?”
3. How much are you willing to set aside?
Of course, you need money to invest. Investing should be systematic. This means that you should be factoring in your cash flow and entire budget when beginning to invest. How much are you willing to set aside from your monthly income or your savings? How much are you willing to invest to meet your financial goals and objectives?
Remember that you should not invest if you are struggling to make ends meet or if you will be forced to cut down on essential expenses and use your emergency fund. Apart from the safeguards mentioned above, you need to have an investible fund.
4. What is your risk profile?
There are risks to investing. Some are high while others are low. It is critical for you to know your risk profile to guide you with your investment decisions. What is your risk profile? How much risk are you willing to take to meet your financial goals and objectives?
There are three major risk profiles. These are conservative investors, moderate investors, and aggressive investors. Each profile has its suitable financial products, securities and instruments, and assets. Which one are you? Where should you invest?
Conservative investors prioritize preserving the purchasing power of their capital or their wealth. They are suited for money markets such as bank savings accounts, time deposits, and fixed-income securities such as government and corporate bonds.
Those who want to reduce risks and enhance their returns albeit over a longer period are considered moderate investors. They are also called balanced investors. They are suited for passive investment options such as investing in growth funds and balanced funds offered by fund management firms, as well as active investment options such as high-interest time deposits, fixed-income bonds, real estate, and certain stocks.
Aggressive investors believe that with high risks come high returns. They are suited for active and passive investments in stocks, especially in growth stocks and medium-to-small-cap stocks. Forex, cryptocurrencies, futures, and options, as well as certain real estate, are also suitable investment options for these individuals.
5. How does your chosen investment work?
You should be able to decide what investment options are suitable both for your risk tolerance and your financial goals and objectives. However, before you decide on what vehicle or product to invest in, you should ask yourself: How does the investment work?
Remember that not all investment vehicles and products are created the same. They have their respective pros and cons, as well as characteristics that are unique to them. You need to understand your chosen investment well enough to explain it to someone else.
The following are more specific questions to ask: Where does the investment vehicle or product invest your money? How does it grow your money? What is the average timeframe for this chosen investment to meet your financial goals and objectives?