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Before you start Investing

Discussion in 'What is Investing? (START HERE)' started by InvestOpen, Jul 4, 2018.

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  1. InvestOpen

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    Before You Start Investing

    The investing process may last a few days, months, years or even decades. Regardless of the timeframe, investing requires preparation. Beginning to invest requires a self-evaluation, followed by assessment of the required items necessary for creating an investment plan.

    Self-Evaluation

    Before investing, take an inventory of where you stand financially, as well as in life. Here are a few key items to consider:
    • Current stage in life: Younger people generally have longer time horizons then older individuals as they invest for retirement or general wealth due to the time available for investing and compounding interest as well as the general needs. Additionally, older individuals typically need more stability in their principal balance and cash flows, whereas younger people may be able to handle more volatility that can be smoothed out over time.
    • Debt To Income: Total debt expenditures relative to income flows provides a key metric to investing. Due to the time an investment takes to mature, capital ties up and is no longer available to service debt. Understanding the impact of not having those funds liquid helps investors determine their margin of safety in servicing their debt. Banks use the debt to income ratio when applying for a home loan to determine the likelihood you will be able to service the debt.
    • Personal Preferences: Investing is as individual as a person. Consequently, investors need to understand the following preferences and tolerances:
      1. Active vs Passive Investing – How much effort & time for research and analysis
      2. General Aptitude for Investing – Personal skills to analyze investments
      3. Risk Tolerance – Amount of volatility tolerated by an investment
    Plan Preparation

    Setting yourself up for an investment isn’t much different than any preparation for a project or event. Several key ingredients make up the foundation in nearly every case.
    • Inventory Assessment: Account for all of your financial assets and liabilities and net worth to determine the total amount of funds you can invest.
    • Emergency Fund: Sometimes life deliver unexpected events. Emergency funds absorb the shock of unexpected payments from circumstances like car repairs or medical payments. Purchasing insurance plans with higher coverage and lower deductibles can reduce the amount of emergency funds required to set aside
    • Set Financial Goals: While this topic is discussed more in other sections, financial goals drive the entire investing process. Knowing where you want to go sets the parameters for how you invest.
    • Credit Score: If investing involves taking out a loan, your credit score can determine the size of the loan as well as the interest rate you will be assessed.
    • Spending Flows: Knowing your income sources and expenses allows investors to evaluate those flows’ stability and longevity. Bonus payments may not be consistent, but deciding what to do with them if they occur should be part of an investment plant.
    • Total Risk: One of the most important aspects of investing is understanding the total risk of an investment. Investments should be something you are comfortable with that if a worst case scenario occurs it will not cause ruin. Taking on investments that are a higher risk than planned or can be tolerated can lead to shortfalls on debt payments, basic living expenses, or force a premature liquidation of an investment.
    If you're in a position to invest, you'll first need to realise your own personal financial goals.

    < Why Do People Invest? | Setting Your Financial Goals >

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    Last edited by a moderator: Aug 1, 2018
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