WORK ON GROWING YOUR INCOME
The one thing that majority of new investors never understand is that investing your money does not always mean you will get more money. Surprisingly for most investors, they end up losing more money than they expected.
This is why you have to do your homework well before you put any amount of your money in any investment.
DO NOT TAKE MORE RISK THAN YOU CAN BEAR
The easiest and quickest way to lose your hard earned money is not by overspending or reckless spending as many people think. It’s by making poor investing decisions. It’s not easy to spend huge chunks of money at a go without questioning your spending habits. You will easily realize you are making bad financial decisions and hit your panic buttons. On the other hand, an investment decision gone wrong quickly sweeps your bank account without a trace of your hard earned money.
As you begin your investment journey, realize the level of risk that you can take. Every investment has some level of risk in it. That’s why there is a chance to make money. Do not risk money that you cannot afford to lose. The last thing you want to do is to lose your money after putting all of it in a single investment.
PROTECT YOUR TREASURE
Do not invest in areas you are not familiar with. Consult trusted people to help you make the right investments in the right places.
Finally, do not bring the burdens of others upon yourself. Giving some of your money for charity and helping others is great only when done in the right way. Don’t end up helping too much and losing everything.
Helping others at your own expense is self-sabotage.
THERE IS NOTHING LIKE A LOW RISK INVESTMENT WITH HIGH YIELD
You can have low risk or you can have high yield, but you cannot have both in the same investment.
When you come across someone promising you high yield with low risk, take your money and run away. He’s probably a scammer trying to walk away with your hard earned money.
THE EMERGENCY FUND
The first step to getting started with investing is creating an emergency fund. An emergency fund is a set amount of money that covers your daily expenses for a certain period of time. It acts as a back-up in case you lose your main source of income. It comes in handy because it can bail you out in times of financial emergencies instead of having to sell off your assets. Selling off your assets diminishes your returns as most assets have to be held for long periods of time to yield maximum returns. An emergency fund should cover your daily expenses for at least 3 months. However, if you have only one source of income, and you have other people who depend on your income, your emergency fund should cover expenses for at least 6 months.
It's better to have an emergency fund that can cover you for a longer time than one that can serve you for a shorter time. In the desert, having more water is better than having less water.
FACTORS THAT YOU SHOULD TAKE INTO CONSIDERATION WHEN CHOOSING YOUR INVESTING STYLE
AGE
Young people have a lot of time on their hand unlike elderly people who are just about to retire or have retired. Young people have several decades to earn more money ahead of themselves. Old people do not have this time. They cannot afford to make big financial mistakes. This is because their earning period is almost over and have a few years left to make more money from their jobs
Old people tend to be the more preservative or conservative investors. They tend to invest their money in low risk investments and are comfortable with low returns since they cannot afford to lose big chunks of money from their retirement kitty.
On the other hand, young people can afford to entertain higher risky investments in their portfolios.
MENTAL CAPACITY
You want to invest in places that you are comfortable with. You want to put your money in places where you can afford to sleep well at night with no worries of losing your hard earned money. You do not want fear of losing your money to prevent you from doing your daily tasks.
In the Motley fool, Tom Gardner writes,“The biggest cost of investing is the emotions of being uncomfortable, uncertain about the future and wondering whether you are doing the right thing. These costs are orders of magnitudes.
TIME
How much time can you allocate off your schedule to look at your investments? Do you have the time to analyze companies like stock pickers? Do you have the time to follow on tenants and do house repairs like real estate investors? These are some of the factors you should consider to evaluate if you will have the time to invest in a particular asset class.
Active investors who actively invest in individual stocks spend a lot of time analyzing companies. They have to evaluate their investing thesis and keep on following the activities of the company so that they can keep on verifying that their money is invested in the right companies.
YOUR INVESTMENT GOALS
What are your investment goals? What’s the lowest average annual return rate that you are comfortable with? Why are you investing your money?
STICK TO YOUR OWN PATH
There are several different ways of building wealth, just as there are several different ways of doing anything else. The most important thing to remember is that you don’t have to follow someone else’s path just because it looks easy.
There are always trade-offs in life and in investing. What works for others might not work for you.
In the Psychology of Money, Morgan Housel writes,In the Psychology of Money, Morgan Housel writes, “Every investor should pick a strategy that has the highest odds of successfully meeting their goals.
…If you can meet all your goals without having to take the added risk that comes from trying to outperform the market, then what’s the point of even trying? I can afford not to be the greatest investor in the world, but I can’t afford to be a bad one.”
If you understand the math behind compounding, you realize that the most important question is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?” The only thing that matters is where you are in the long run.
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