Awesome! You’re finally thinking of investing, welcome to the family!
Here’s the trick: before you start investing, ensure you’re prepared so you don’t lose your hard-earned money. These are some questions you need to ask yourself:
- Do you have a stable source of income?
- Do you have an emergency fund?
- Have you paid off your debt?
- Do you know about investing?
If your answers to all these questions are ‘YES,’ then kudos to you! You’re ready to join the big leagues and make some cool money for yourself. But if you’re not too sure of where you stand, here’s a breakdown of what these questions really mean.
1. Do you have a stable source of income?
Imagine building a house starting from the roof; that’s absolutely impractical. Same with trying to invest without having a stable income. A steady income allows you to meet your needs, such as food, housing, and health care. Without satisfying these needs, it is difficult to stay faithful to your investments.
With a stable income, you can do much more than just meet your needs; it is the foundation for investing. Without income, there is no wealth to be built.
2. Do you have an emergency fund?
Emergencies are unexpected (usually unpleasant) events that you can’t predict and therefore can’t plan against. Your emergency fund needs to be accessible and sufficient to bail you out of emergencies.
While you’re investing, not having an emergency fund could mess your entire investment strategy up. This is because you’ll either be tempted to use funds from your investments (i.e., sell part of your assets) or borrow money to address the emergency.
If you choose to use your investments, you might not be making a practical decision and might end up selling at a price lower than what it cost you. That’s a loss! And if you decide to borrow, that simply means you are dedicating a large chunk of your future income to paying off debts with ridiculous interest rates.
3. Have you paid off your debt?
Debt could hinder the amount you can invest. This is because debt is an obligation. Debts can be high-interest, low-interest, or zero-interest. High-interest debts accumulate faster and should be paid off as soon as possible. However, low- or zero-interest debts, such as mortgages, can be managed alongside investments.
4. Do you know about investing?
Are you indeed ready to invest? If you can’t tell the difference between one asset and another? Can you at least recognize red flags and not fall for scams advertised as investment opportunities?
If you can’t, you shouldn’t attempt to invest just yet. Take the time to learn about investments in general: the different asset classes, their features, and other related concepts.
As a rule of thumb, if you can’t explain an investment, you should not be investing in it.
