Investments make your money work for you. It involves the task of purchasing assets that can be a source of wealth creation in the future. The returns on the investments will give financial stability hence it is always recommended than leaving your money idle in your wallet or a bank account. Concerning investments, time is money. The earlier you start investing, the longer your money stays invested and the good returns you can earn. It works on a concept of compounding interest: Your returns will start earning returns on themselves.
Though you need to start investing early, you shouldn’t rush into it without prepping yourself in all the ways. There are several things you need to understand about investments. Here’s a checklist for you before getting started with investments.
Make a Financial Goal
Every investment must have a financial goal. The investor must start with making a short term or long term goal. It can be anything like buying a house, a car, retirement funds, starting a business, a child’s education, etc. Once you have a goal, you can make a plan on how to achieve it.
Every goal will have a timeframe set. For example, in the case of children’s education, there can be a specific time, retirement can be after 30 years assuming you are 30 years old now, buying a house can be a short term goal which needs to be achieved in 5 years from now.
When you have a goal set and the time limit for the goal, you can check how much money you will be needing approximately to fulfil the goal. This will make you pick an investment asset accordingly because not all the assets will be ideal for all the goals.
Check: New financial goals after clearing debts
Evaluate your Budget
Budget evaluation is an important step once you are set with a goal for the investment you can reevaluate your budget. Check your incoming and outgoing cash flow and find out how much you will be able to contribute to the investment. This will also give you an idea of your financial situation.
Keep your Emergency Fund Aside
Every investor is advised to put at least 3-6 months of income as an Emergency Fund. Emergency funds are the only funds that can save you during any mishaps like job loss, medical emergencies, etc. Your emergency funds should cover you for 3-6 months till you find an alternative or till your financial situation gets back to normal.
Put the emergency fund aside in a bank account and don’t touch it until it’s a real financial emergency.
Evaluate your Risk
It is a well-known fact that investments are involved with risk. Though each investment has its own risk levels like low, moderate or high, there are no investments that don’t involve any risk.
While investing you must determine your risk tolerance. You must have a goal and be planning financially to start investing to reach the goal but you must determine how much risk can your financial situation take? According to your risk appetite, you can pick an investment.
For example, if you are planning your investments for retirement. Say you have 5-10 years left for retirement. In such a scenario, if you are investing in investment assets like stocks or mutual funds where the risk levels are high, there are chances of you facing a huge loss. If the market goes down at the time of your retirement then you will be left with nothing financially to support during your retirement phase.
Suppose, if you have more than 20 years for retirement then you can consider stocks or mutual funds. As you have enough time to cope up with the risk involved.
Therefore you must check how much risk can be taken, check your timeline and invest according to that.
Understand the Investments
There are various investment options and it can be quite overwhelming for the investors to understand what suits them the best. Though investments make your money grow efficiently, it is important to understand the working and invest in the right way only after getting a clear picture of it. Not investing or investing in the wrong way can mean the same.
Not every investment will work for your goal. If you are investing to buy a car in the next 3 years, then investment assets like Stocks or Mutual Funds may not be of great help here.
Investments can be categorized into Short-term, Medium-term and Long-term according to your goals. Once you get a clear picture of which investment will work for your goal then you can invest and enjoy the returns.
Get an idea of Inflation
Inflation is an essential factor that you must never miss while investing. The value of the currency will not always be the same. A product that is available for AED 100 today will be AED 150 after 5 years and that is due to inflation where the value of money increases.
Some investment options like mutual funds, gold, stocks hedge against inflation that is they also tend to rise along with inflation. But whereas assets like bonds, deposits are indirectly proportional to inflation.
For example, if your deposits are providing a 10% interest rate at the end of the year and you planned to buy a product with the deposit returns. During inflation, the product rate might get doubled and your deposits returns will not be sufficient to buy the product.
Get a Bank Account
Once you are clear all the steps like the financial goal is set, your budget is evaluated, your investment risk tolerance is determined and the right investment is also picked, your immediate step would be getting a bank account to manage the investments.
You must get a separate bank account for automatic debits and credits. Using your regular bank account might not give you an explicit picture of the investment.
Avoid Scams and Frauds
Where on the one hand investments are becoming easy for the investor to fulfil the financial goals, there are several scams taking place to con the investors. Before investing in any asset do proper and thorough research. Take the advice of a professional investment planner.
These days investment has become very easy and convenient. Also, there are no eligibility criteria for investment. All you need to do is understand the working of investment and align it according to your goals.
About the author
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.
