Investing for the first time can be a challenge – overwhelming in fact. Despite its importance, investing is not a skill that is often passed on from generation to generation like riding a bike, learning how to shave, brush your teeth, and so on. There are always exceptions and those who do receive advice from their parents are often decades ahead of their peers when it comes to investing.
While I always was curious about investing, I never made the leap to actually do it myself until 3-4 years ago. Now that I’ve been doing it for some time now, there are several things that I realize are important to consider BEFORE making the leap.
It won’t be the end of the world if your first investment is a bad one since you will likely be investing with a little money – and the wisdom gained from your mistake will outweigh the financial loss. BUT, that doesn’t mean it’s not better to be prepared.
Don’t Forget to Consider These things BEFORE Investing
Here are four things that you need to consider before making that first investment:
1 – Are You Ready to Invest?
One of the first things you need to evaluate is whether you are ready and capable of investing. This may seem like a simple question, but it’s much more complicated than it sounds. You should factor in the following:
- Are you spending more money than you earn?
- Do you lack an emergency fund (because I have recently learned how important it is to have an emergency fund)?
- Do you have any high-interest debt (like student loans)?
- Will it hurt you if you lose this money that you want to invest?
If you answered YES to any of these questions, you are NOT ready to invest. Address these issues first before thinking any more about investing. Seriously!
2 – How/Where Will You Invest?
When I say “where” I don’t mean which brokerage (although that is important too). One of the most overlooked parts of investing for beginner investors is the vehicle with which you can invest. Sure, anyone can open a brokerage account and buy stocks, mutual funds, or ETFs. What they often don’t realize is that they are missing out on many tax advantages.
If you are looking to invest, the general consensus is that you should do the following things in this order:
- Contribute toward your employer’s 401k/403b account UP TO the match. (if you have one and your employer matches)
- Open a Roth IRA and max this out before doing anything next
- If you still have more money that you want to invest in, go back to the tax-deferred account at your employer and max it out.
- Then consider a taxable account for all other investment options
It’s important to consider the tax implications of investing BEFORE you start investing. There’s no reason to pay good ol’ Uncle Sam a portion of your positive returns.
3 – WHAT to Invest In?
Another tricky component (read the trickiest part) of investing is deciding what to invest in. The options are basically endless, while that is a good thing, it also complicates the matter. There seems to be a false narrative out there convincing everyone that the only way to invest is to buy stocks. What they don’t realize is that stock picking is extremely complicated and difficult to excel at. Instead, consider focusing on index funds. You can also consider many mutual funds and EFTs to achieve proper diversification, but don’t forget to look at the fees.
4 – Liquidity
Last, but certainly not least – you need to consider liquidity. Liquidity is a term used to describe how easy it is to pull your money out of an investment. This is often not an issue for most stock market investments, but if you are going to consider unconventional investments (like a limited partnership or whole life insurance) you need to make sure you know what you are getting yourself into. You may be promised higher returns, but that comes at a risk of locking in your money for a long-term. I was forced to do this with my real estate limited partnership and while I’m still happy with the investment, if I needed the money for an emergency, I’d be in a tough situation.
Investing doesn’t have to be paralyzing, but you should not take it for granted. There is a lot to learn and you need to learn the basics before making the leap. The last thing you want to do is to think that you know what you are doing and find out years later that you have been throwing your money away all this time.
My father has been thinking about investing on stocks but he’s still in the process of figuring out the what’s and where’s. We’re trying to help him as much as we can. I think he’ll appreciate seeing this post. Thanks for sharing!
With higher returns, generally comes more risk. I see potential RE investors that want big profits, than wind up chasing a measly 5% return in RE. You are better off with a dividend ETF, than owning a property that only get 5% returns.
Study all alternatives. make a decision based on risk, and reward.
Great article, well written. We are looking for a guest blogger if you are interested . check us out at http://blog.stockshop.co.za/
Good points, but a few comments:
I would not wait to start investing in retirement accounts. Start as early as you can, even if you have student loans still. Its best to balance all your financial priorities and time is the best asset to put to work.
I just opened up a Roth ira account at Betterment and recommend everyone check it out. The technology they employ makes investing efficient and smart and for a very low fee. Everyone should at least look into it. Their basket of ETFs is very wiseley chosen; much better than a novice investor could.
Lastly, whole life insurance may be a good insurance depending on your situation but not as an investment vehicle. As Suze Orman says: insurance is insurance, and investments are investments. Don’t mix them.