Preparing Your Finances For Investing
1. Pay Off All High-Interest Debts
If you have any high-interest debts, anything over 10%, before you even consider investing your money, you need to be paying off those debts. Whether it’s credit card debt, student loans, car payments, or the likes, paying off these debts will result in a number of positive outcomes for your investing preparation.
Paying off your high-interest debts will have an immediate positive impact on your net worth. Having a high net worth is generally a sign that you are doing well financially and is often even used to determine whether you’re financially independent. It’s often thought that once your net worth equals 25 times your annual expenses, you’ve reached financial independence.
One common area of high-interest debt that plagues individuals looking to invest is auto loans. When you are purchasing a new car, make sure that you do proper research to decide how you will finance your new car. Auto dealers will have a credit union or bank that they partner with, but they may not always have the best option for you. Shop around before purchasing your car to make sure you get the max return on investment for your new purchase.
Another benefit of paying off your high-interest debts is a decrease in monthly bills. This means more money left to invest in other areas.
Paying off your high-interest debts will offer you a max return on investment as you are able to invest higher amounts and be more and more financially stable.
2. Practice Smart Spending Habits
You’ll never have the funds necessary to seriously invest if you don’t practice smart spending habits for the money you have now. Take a few steps to build up the savings and good habits you need to invest the most and get the max return on investment possible.
The first step to creating good spending habits is to build a monthly budget. People are often shocked by how much money they actually spend on non-essentials each month when they take the time to calculate it out. Creating a budget that aligns with your current financial goals will empower you to have better control over your money and know exactly where every cent needs to go. You’ll start by calculating your income each month and then write out each necessary expense, including rent, groceries, utilities, and other bills. You can also write in a portion for entertainment, but if you are working towards paying down debt or saving money, you may need to cut down entertainment spending for the time being.
Another tactic to control your spending is to carry cash. With a card, it is easy to lose track of how much money you’re actually spending because you can’t visually see it dwindle away. With cash, you know exactly how much you have left to spend. There is a common budget technique called the envelope method where people take out cash for the spending they have to do each month, for groceries, gas, and other necessities. They keep the money designated for those areas in an envelope. This way, they know exactly how much they have left for that specific area of the budget at all times and know if they can afford to spend a little more or need to hold back.
And finally, the most difficult area for individuals to crack down on is non-essential spending. If you haven’t taken the time to write out your goals for savings and a budget, it is much easier to spend frivolously. Whether its clothes, electronics, or fast food, unnecessary spending during a time where you are trying to meet a specific financial goal will hamper your ability to reach it. A simple answer is to ask yourself a few questions before you make a purchase, “Is this a need or a want?” or, “Do I really need this?”. Most of the time you don’t really need a wanted item to survive, and if the answer to the latter question is no, remember that that money can be used for much smarter, lasting things. Cutting down on these non-essential purchases will help you to save more money to invest which ultimately will help you achieve a max return on investment.
3. Think About Retirement
One of the primary reasons many people choose to invest is to save money for early retirement. The government offers many opportunities to invest in retirement security, so don’t pass these by.
If your employer offers a 401(k) retirement plan, don’t skimp on it! Many companies event match savings to a certain percentage. Saving this way is a great option because the money comes right out of your paycheck, making the transaction much easier for you.
You can often invest towards your 401(k) with pretax dollars which will reduce your tax burden for that year. Roth 401(k)s and IRAs are taken from after-tax income, but when you withdraw, the funds won’t be taxed. Both options have their own positives, so just make sure to do your research beforehand to receive a max return on investment.
If you haven’t started contributing to your retirement savings, it’s never too late. The earlier you start, the more you’ll save, but if you never start, you’ll regret it when retirement rolls around.
How To Get Started
Now that your finances are prepared for investing, you will likely be wondering where to start. There are so many options for where and how to invest your money, it may seem confusing. The best thing you can do for yourself when starting to invest your money is to work with an investment management company. Here you will have access to seasoned professionals who can guide you through the process and help you find the most productive places to invest your money for a max return on investment.
There are some people who would prefer to take charge of their own investment, and as long as you have done thorough research and are sure that the choices you are making are the best, go for it! Investing your money is a huge step towards empowering yourself to be more financially independent and whether you work with an investment manager or do it yourself, you’ll be glad you started.
If you’ve gone through all of the previously mentioned steps of preparing your finances for investing, setting financial goals will be something you are familiar with. So you shouldn’t be surprised that now will be the time to set some more. As you prepare to invest your money, you’ll want to set goals for what you want to achieve. That could be a goal of how much you want to save by the time you retire or an even shorter-term goal, such as how much you want to save in five years. You may even set both short and long-term goals to help you along the process. The key thing is actually setting goals, especially at this time. Having specific goals here will help you to keep track of your savings and make adjustments if you are not meeting those goals. These goals will empower you to get the max return on investment for the work you’re doing.
Choosing Your Investments
Now comes the time to actually decide where you’re going to invest your money. Like was previously mentioned, there is a huge variety of investment opportunities to choose from. As you consider the different options, you’ll also want to consider the different risk levels. For beginners, it’s best to focus on some of the most common:
- Stocks
- Bonds
- Mutual Funds
- Real Estate
Stocks
Purchasing a share of stock means you have legal ownership in a business. Businesses offer stock to raise money. There are two varieties of stock, common and preferred. A common stock gives the holder a dividend that varies based on the fortune of the company. Preferred stock gives the holder a specific predetermined amount.
You can purchase stocks through a brokerage account or even apps. There are many other options for purchasing stocks as well, such as through your non-profit company, or an IRA.
Earning profit from stocks is not something that happens in a short amount of time. Real money is made by holding the stocks for the long-term, earning interest and dividends on that stock. So if you want the max return on investment for your stock purchases, be prepared to hold on to them for the long haul.
Bonds
A bond is a contract between you and a company or government entity. The contract generally states that they can borrow your money for funding projects or refinancing a debt. You loan that money to the entity for a set period of time upon which they will return your loan with interest. Because bonds are a lower risk than stocks, they are a great option to add to your investment portfolio to balance it out. Bonds are also great to get a max return on your investment as compared to some other options because while they still have risks associated with them, they are lower risk and often yield in profit.
Mutual Funds
A mutual fund is a professionally-managed investment fund where multiple investors pool their money and use it to buy a variety of investments. This is a great option because it allows investors to purchase investments they may not normally be able to afford. This option allows you to diversify your investment portfolio at a quicker rate due to your variety of investments. You can make money three different ways from a mutual fund:
- Income Earned: This comes from dividends and interest on stocks and bonds.
- Capital Gain: This comes from a increase in the price of securities.
- Increase In Fund Share Prices: If fund holdings increase in price, you would have the option to sell your shares for a profit.
With mutual funds, you are usually given the option to receive a check or reinvest your earnings. To receive the max return on investment, make sure to talk with your financial advisor before making a decision.
Real Estate
Real Estate investment is an option that will diversify your investment portfolio. Many people invest in real estate by either purchasing a home or becoming a landlord. There are other options, such as investing in REITs.
For those looking to invest in real estate there are investment properties in almost every area. Many choose to purchase a house with the intent to fix it up and resell the unit at a higher price. Especially with an older house, there are many changes that can be made to raise the value of the home. One could be hiring roofers to replace an old or damaged roof. Remodeling different areas in the home are also a great way to increase the value and get a max return on investment. An option could be a basement remodel for an older home, whether fixing it up or finishing it to create more living space rather than simply storage. Remember when you are ready to sell your house, digital marketing is key for this industry.
Even just purchasing your own home and making upgrades while you live there will yield in profit. If you don’t have the skills to make sure to look into remodeling companies in your area to discuss different options for your home. Bathroom remodeling is a great area to start as it often gets a lot of wear and tear and leaves a lot of room for improvement. You can also work with a commercial contractor if you are planning on making big changes to your home. When looking to get the max return on investment for your house purchase, living by the rule “leave it better than you find it”, will generally lead to success.
