Before you start investing it’s important to make a plan of action so that you know what you’re doing and where you stand. Investing is important if you want to be able to retire some day in the future. Even if you earn a limited income you can save for your future. Despite the volatile stock market, most people have recovered their losses and then some. Remember investing is a long-term plan.
Determine Where You Are Today
It’s very important to check your current financial status by writing down all your assets, income, and debt. Separate debt into good debt, like student loans and mortgages, and bad debt like credit cards. You can easily use a spreadsheet on Excel, or you can use one of the free documents from Google Docs that are available.
Link – https://docs.google.com/templates?q=budget&category=14&sort=users&view=public&urp
Set Goals for Where You Want to Be
When you know where you are, you can finally set some goals for where you want to be. Have various goals for 5, 10, 15 and 20 years or more depending on the age you plan to retire. Don’t assume you have to retire at 65 – some people, if they manage their money well, can retire much sooner. Others prefer to retire later at 70. It’s up to you to set your goals and plan for it.
Pay Down Consumer Debt
One of the most important things you can do for your future is to pay down consumer debt. Consumer debt consists of personal loans and credit card debt that has very high interest – usually more than 10 percent and sometimes approaching 40 percent. This type of debt is not good to have and if you think about it, by paying it off you’re earning whatever interest rate they’re charging.
Determine Your Risk Tolerance Level
Some people do not feel sick when they invest money that they might lose. Other people cannot stomach the idea at all. If you are risk averse then you should choose safer investments even though you’ll get a lower return. If you are okay with the risk of losing everything then you have a high tolerance and can invest in more risky investments. With these you could earn 11 percent or more on your money.
Choose an Investment Strategy Based on Your Risk Tolerance
Now that you have that information, you can start creating an investment plan. If you have high tolerance to risk you can invest mostly in stocks, and if you have a low tolerance you would invest mostly in bonds. If you’re in the middle someplace you may want to choose a mutual fund to invest in. If you really have money to burn, you may choose to try alternative investments such as options or real estate.
Based on Goals and Risk Tolerance, Determine How much Savings You Need Each Month
Using the estimated figures supplied to you by the investing entity you choose to work with, determine how much you need to invest in each area each month to reach your short-term and long-term goals. For example you may need to build up your liquid savings, or catch up on your Roth IRA before buying a mutual fund. Determine all of that, and then work toward your goals each month.
Monitor Your Investment Plan Regularly
Check on your investments periodically to find out if you need to catch up, or if you’re ahead of your goals. For example, if you check after five years you may see that you filled your need for liquid cash and paid off all your consumer credit. Now you can invest that money into stocks, bonds, mutual funds or a more risky enterprise based on your risk averse level.
Now that you’re on your way investing, you can actually sit back and relax. You’re investing based on your tolerance for risk, and the disposable money you have available to you each month, so you should be able to live your life and only check in on your investments occasionally. Daily checking can cause stress and anxiety and not give you a real picture of your investments anyway.
Creating an investment plan is a good idea for everyone. Most people can start very young, investing money even in high school with their first job. It’s important to try to at least save about 25 percent of your income from day one. If you can do that, you’ll never have to worry about your retirement years.