Are you ready to start investing? While it’s an important step toward financial security, since contributing regularly to your investment portfolio can help you build wealth, it can be scary. You may be afraid to invest because you don’t understand the market or because initial investment options are bothering you in many mutual funds. While it’s always better to start investing sooner rather than later, there are a few things to consider before you start building your investment portfolio.
Are you in shape financially?
You need to check where you are financial. There is no point in investing money if you have significant debt and no emergency funds. Plus, by paying off your debt (especially credit card debt) and saving for emergencies, you free up more cash to invest.
Before you start investing, it makes sense to take some time to pay off debts and establish an emergency fund. It’s worth noting: your emergency fund should be large enough to cover costs for three to six months. If your career field is unstable or you are self-employed, you should go with six months to a year of savings.
Reasons why you should start investing
Time is (still) on your side
Ideally, we should all start investing from the moment we are born. But let’s face it, many of us don’t think about it until we’re in our 20s and 30s, even though we have opportunities to invest before then. Don’t worry, you can be an investor at any age, but every second you wait, you’re giving up your most important asset: time. Bonus: By investing when you’re younger rather than trying to stock up on large amounts of money later in life, you give your money a chance to work “smarter” rather than harder.
It allows you to take control of your future
There is something powerful about telling your money where to go. Instead of spending it, or worse, not knowing where your money is going, by investing you are giving your dollars a “job”: getting rich over time.
That said, wealth is not about investment. It involves building a financial safety net for yourself. At some point in your life, you will have to stop working. It’s okay to make mistakes. Many people avoid investing because they are afraid of making a mess, choosing the wrong stocks, for example, or losing money. Investing in this great difficulty is not that you need to spend tons of time and energy to get it right. You don’t have to be a real estate mogul or a Wall Street mogul. In fact, here’s some good news: you’re young, so you can “afford” to make some mistakes, especially when it comes to making your first investments.
Thanks to compound interest, the earlier you start and the more money you can set aside, the more likely it is to show up, even if your investment returns aren’t always in positive territory. The average annual return of the S&P 500 Index for the past 90 years has been 9.8%.
Grow your money
Investing your money will allow you to grow it. Most investment vehicles, such as stocks, certificates of deposit, or bonds, offer long-term returns on your money. This result allows you to raise money, creating wealth over time.
Save for retirement
When you work, you should save money for retirement. Put your retirement savings in an investment portfolio, such as stocks, bonds, mutual funds, real estate, businesses, or precious metals. Then, at retirement age, you can withdraw the funds earned from these investments.
Depending on your personal risk tolerance, you may want to consider taking more risk at an earlier age with your investments. Higher risk increases your chances of earning more wealth. It may be wise to be more conservative with your investments as you age, especially as you approach retirement age.
Tax base reduction
As an investor, you may be able to reduce your taxable income by investing pre-tax dollars in a retirement fund, such as 401 (k). If you create a loss on one investment, you may be able to apply that loss to any gain on other investments, reducing the amount of your taxable income.
Achieve financial goals
Investing can help you achieve big financial goals. If your money is earning a higher rate of return than a savings account, you will be making more money in the long run and in a faster time frame. This return on your investments can be used for key financial goals, such as buying a home, buying a car, starting your own business, or getting your children to go to college.