We have all heard the stories of Warren Buffett, John Templeton, and Peter Lynch. Some of us, no doubt, have wondered what it would be like to be a powerful, sharp-minded mogul whose fortune is enough to buy out a small country (or several of them). The perfect life, greener lawns, infinity pools, private jets — they didn’t come by luck. The Warren Buffett-s of the world are not super humans, they are super smart (investor) humans.
If you’re daydreaming of being a successful investor yourself, the short advice is — stop dreaming and start planning. Here is a quick rundown of the 5 main factors you need to consider before you start your investment journey.
#1 Set up an emergency fund
Like it or not, things don’t always go according to plan, and fate has a funny way of intervening with our endeavors. Sure, you may have a bulletproof investment plan, but what if you lose your job in its early stages? What if your car breaks down or you get sick? Or both?
Of course, to many Americans, the easy fix to those is the double-edged sword, also known as a credit card. But they are not your best friend in any way, as you just end up with more debt on your hands, and there is the problem of identity theft. If you’re in the unfortunate situation where your identity has been stolen, your credit card becomes useless. Banks can also cancel your card if you’re struggling financially.
Bottom line, every smart investor has a contingency plan for unexpected expenses.
#2 Eliminate your bad spending habits
Let’s face it, we all have those. Maybe you have a sudden urge to go shopping when you’re upset, or you love collecting expensive glass or action figures that gather dust and nothing more. Ask yourself, “Do I really need this?”
The solution to bad spending habits is either to cut them or to start earning more money. But usually, even if the latter is a feasible option, it just means your spending will increase exponentially. So, what can you cut that won’t hurt your happiness?
It can be any forgettable purchase like the extra item tossed in your shopping cart, the shoes you bought but wore just once, the digital subscription you’re not really using, the kitchenware that some sales guy sold to you but you have yet to figure out its purpose, the list goes on. The question is not in how to invest less, but how to make smart purchasing decisions.
#3 What are your goals?
No, we are not talking about the “survive Monday” type of goals. We are talking about your long-term vision, your life goals. Why does that matter?
The main principle in any investment decision is to never invest without a clear purpose. If you lack that, you can’t set a realistic timeframe nor assess the amount of risk you’re willing to take on.
Let’s look at an example. The stock market is extremely volatile, which means there is a significant short-term risk if you invest in it. However, in the long run, statistics show that it is relatively stable — the average annual return is 7%. If your goal is short-term ROI, then investing in the stock market is not the right solution for you. Know your end goal, so you know how to invest in the right portfolio.
#4 Understand your investment options
Here comes the tricky part. There is a dizzying amount of investment options, and if things like stocks and bonds, ETFs and mutual funds, index funds and precious metals mean nothing to you — get learning. That’s the best thing you can and must do.
#5 Pay any high-interest debt you may have
In other words, tie up loose ends. If you have any high-interest debts (usually anything with an interest rate higher than 8%), the best thing you can do is to pay them off. There is no point in keeping those debts, paying the high interest, and relocating your resources to investments whose ROI is not enough to cover your interest payments and finance charges.
Doing so will also positively impact your net worth, causing it to climb up as you will no longer be held by your high-interest debt payments.
These are the 5 starting points, but they are not the only ones. The road to becoming a successful investor passes through a learning curve that you cannot escape. So, get learning and planning today!