Each of us has a different vision of how we want to live our lives. Some people may envision spending more time with family and friends. For others, traveling the world and experiencing new adventures may be their ideal future.
Each of us has a different vision of how we want to live our lives. Some people may envision spending more time with family and friends. For others, traveling the world and experiencing new adventures may be their ideal future. Some want to spend their golden years making a difference in the world, while others just want to kick back and relax on a beach somewhere. But the one thing everyone has in common is that life in today’s world requires money and free time to enjoy the things that make you happy. To help achieve your personal lifestyle goals, you must be able to save money and possess the knowledge you need to make informed investment decisions.
Investing gets your money working for you instead of you having to work for every dollar. Imagine being able to earn money while you sleep, travel on vacation – even while you’re enjoying your favorite pastime. That may sound like a fantasy, but it is possible when you’ve made good investment decisions.
Most people today rely on Social Security (SSI) and Medicare. Speculative projections on funding suggest that SSI and Medicare may be bankrupt as early as 2033. While this outcome is not set in stone, you should still put alternative plans in place to help mitigate your risk and diversify your retirement income sources.
Envisioning what financial security means to you is the first step. Take the time to really think about what it is you want. We are all very different and what financial security means to you could be totally different from what it means to the person sitting next to you. Write down your goals.
There are many compelling reasons to start working toward a secure financial situation as soon as possible. Here are some common ones:
Next, determine what your cash flow and net worth are. Cash flow is the difference between the money you have available at the beginning and end of the month. Obviously, the goal is to have a “positive cash flow.” Your net worth is how much money you have left after your liabilities are subtracted from your assets. You can be closer to financial independence by diversifying and increasing your cash flow. At the same time, you want to increase your net worth by reducing your liabilities.
You will need to determine your risk. Evaluating your risk comfort levels, the types of risks associated with investing, and how to measure risk and potential rewards are all important aspects to consider before you begin investing. Risk is the chance that an investment you make will not go as planned. You may lose money. If an investment loses money, you may get “stuck” in an investment longer than you wish, leading you to miss out on other investment opportunities. There are ways to manage risk, but a certain amount of risk will remain in every financial decision you make. There are a variety of risks that will have impact on your investments: Examples can include inflation, liquidity, interest rate, opportunity costs, market sentiment, reinvestment, and political risk. Each investment opportunity also offers a variety of potential rewards. You should clearly understand all the risks and potential rewards associated with any investment you’re considering before investing your money. Understanding your risks and their potential to alter your investment returns is extremely important. Planning, knowledge, sound advice, and due diligence are some ways to minimize or mitigate investment risk.
Next, you should identify your future needs. Knowing your current financial needs while planning for your future needs can help you have money for some of the things you want now, while still making sure you have money set aside for later. Estimating your future needs is important to help determine your investment goals and savings rate. I suggest you create a budget that covers your current needs, but also one that will guide you in the future. Developing a future budget will help you determine the amount of money you should be saving monthly now and will be a factor in deciding which investments may best prepare you for what the future may bring.
The most important thing you need before you make any investment decision is knowledge. It’s also important to locate trusted, reputable, and established professionals to build your financial team. However, while it’s important to have a great team on your side, you shouldn’t use your advisors as a crutch. Your financial decisions are ultimately your own and you should become knowledgeable enough to evaluate the advice from your team of financial advisors. It’s also important to plan across your entire lifetime and think through your lifestyle goals. Your plans are likely to change over the years so it’s important to review and modify your plan at least once per year.
Another key component of preparing to invest is minimizing your debt. If you are in debt, evaluate the interest rates you are paying on your balances. If you are paying more in debt interest than you are making on your investment returns, you should consider allocating more money to pay off your debt first. And let’s not forget that emergency fund. Your emergency fund should cover you in case your income source was to dry up, allowing you to meet your obligations until you replace that income. Factor in the worst-case scenario when deciding how much you need in your emergency fund. Once you have emergency monies set aside, then you should start building up risk capital. Risk capital is money that you can afford to invest. In other words, it’s money you can lose without putting yourself in a dangerous financial position. (Who has that, right?) Think of ways to cut spending on frivolous things that you don’t need and put that money aside for investing.
It is also critically important to have an exit plan in place prior to making any investments. Your plan should detail what action you will take in a variety of scenarios. What if the investment goes up 25%; or what if it drops 50% the first day – what will you do? Having your exit plan prepared in advance will give you time to think through your options and help you make logical decisions that align with your personal financial plan.
There are two powerful emotions that have an impact on our investments. Greed and fear often impact investors’ financial behaviors. You should remain disciplined to stick with the plan you establish and the exit strategies you create – profit or loss. Your plan allows you to decide on your financial goals before fear and greed mix into your reasoning. Some common ways people get off track are:
You may be eager to begin investing but taking the proper steps to prepare yourself for taking that plunge may help you avert some of the inherent risks investments always pose. Gaining a solid knowledge base creates the cornerstone of your investment strategy. This foundation can be supplemented with the advice of a trusted team and conducting due diligence research on every investment you consider. Having an adequate emergency fund, knowing how much risk capital you have available, and careful exit strategies offer you a fallback position should an investment not go the way you planned. These steps can help you develop an investment portfolio that aligns with your long-term goals. And remember, financial success typically doesn’t occur overnight. Stay committed to following a consistent, long-term investment strategy and don’t get bogged down in short- term gains or losses. Staying consistent with your investment strategy also means adjusting your plan as new changes take place with your financial situation.
If you find yourself needing solid advice on where to start, call, email, or text today for a free consultation.
