EasyInvestingTips.com

What is Investing?

Investing is the act of putting your money, by purchase or expense, into something offering profitable returns.  This could be interest, income, or appreciation in value.  We cover many of these options in the website.

Assessing Your Situation

Many people think about investing before properly assessing their situation.  This means you should write down you current assets (things you own with liquid value) and liabilities (things you owe).  For example:

• Assets:  savings and checking accounts, stocks and mutual funds, 401ks, pensions, IRAs, home, autos, etc.
• Liabilities:  mortgage, student loans, personal loans, credit card debt, etc.

This will give you a starting point to see where you are at.  If your assets are larger than your liabilities, you have a positive net worth and can probably look at more “aggressive” investments like mutual funds.

If your liabilities are larger than your assets, you may need to take a different approach with very low risk investments.  This means paying off bad debt more aggressively while also building savings.

Bad Debt

If you are carrying a lot of debt – specifically in the form of credit cards or other consumer credit – it almost always makes sense to pay that off first before considering any types of investments.  Why?  In almost all cases, the rate you pay on your credit card debt is much higher than you can reasonably expect an investment to return – especially for  a beginner!

Mortgage debt is often not considered bad debt.  You get a hefty tax writeoff on the interest and rates are often quite low, especially in the last decade.  However, if your interest rate is very high (7%+), it probably makes sense to pay that more aggressively.

Savings as a Security Blanket

We definitely advocate building up savings cashpile as a security blanket.  It will allow you to weather a financial storm such as the loss of your job.  Also, having that security blanket removes any stress so you can make objective decisions on other investments.

Depending on your personal situation, we would recommend anywhere from 3 months to 2 years of basic living expenses.  Think about the worst case scenario for you and your family.  If you have nobody to fall back on for support, then you want a larger cash reserve.  However, if you are single or could always go back home, 3 months may be more than enough.

We will cover this in another article, but make sure your reserves are highly liquid – this means access to the cash within 24 hours!  The best bets are savings or money market accounts.

Risk vs. Reward

This concept seems easy but people readily forget it and become greedy. Risk vs. reward is simple:  the more risk you are willing to take on an investment, the greater  your potential reward or return on investment.

Savings and money market accounts are considered very low risk but the interest rates are extremely low, especially in the past several years.  On the flip side, investing in penny stocks is extremely risky, but if you were lucky enough to pick a winner, you could receive and fantastic return (BTW – we do NOT recommend penny stocks!).

Remember – every investment has downside risk!

Common Investments

Now that we have some of the preliminary basics covered, what are some of the common investments that are reasonable?  Here are a few that we cover in the website, especially for beginners:

• Savings and money market accounts
• Certificates of Deposits (CDs)
• Precious Metals
• 401ks and IRAs
• Mutual Funds
• Stocks and Bonds

Summary

The point of this post was simple – make sure your own financial house is in order before considering investments.  Pay off bad debt first, build up a cash savings reserve, then consider more aggressive investments.  We will still be here when you are ready.

Good luck!