3 things to know before Investing

12.07.21 07:18 PM Comment(s)

In the words of Warren Buffet: "Investing is often described as the process of laying out money now in the expectation of receiving more money in the future (…) forgoing consumption now in order to have the ability to consume more at a later date."

Investing must be one of your top priorities as soon as you start earning money, it is important to start thinking of your future self and setting some money aside. You work hard every day to earn money so let's make that money work for you. But before starting this exciting journey there are some things you must know/ do first.

1. Pay high interest debt first

Usually, when deciding what to do with extra cash the normal advice would be that if you can earn more interest on your money by investing it than your debts are costing you, then it makes sense to invest. But, having in mind that investments can be volatile, it is generally better to start paying off at least the high-interest debt first before you start investing. After having this high-interest-bearing debt paid off, the best is to prioritize paying down debt while making small contributions to your savings.

2. Have an emergency fund

It is important to know an investment account is not a checking account, the money you set aside toward investing must be money you won't need in the short term. So before starting you should have your basic payments covered and an emergency fund, because sometimes life just happens and you can't afford to take a chance on having to realize losses because an emergency happens at a bad time, forcing you to sell when it does not make sense to. The average amount to have in your emergency fund must be from 3 to 6 months of living expenses such as rent, food and groceries, healthcare, transportation, and others specific to you.

3. Determine your objectives and risk tolerance

If you have got covered steps 1 and 2 then you are almost ready to start. The last thing you have to think of is what are your investment objectives and risk tolerance. In other words, what are you looking for by investing, do you want long-term growth, current income, preservation of capital, and the amount of loss you are prepared to handle while making an investment. Other things to keep in mind when investing are your future liquidity needs if you are planning on buying a house, paying for education.

When investing you can choose to hire an advisor or invest by yourself, either way, the best thing to do is educate yourself and read as much as you can about investment objectives, the risks of investing, strategies, types of assets, and any other topic you don't know about.

Remember the best time to start paving the way for your financial freedom is now, you don't need to have a lot of money to start, small steps in the right direction can lead you to success, your future self will thank you!