An investment is something that is purchased with the intent to resell at a higher price. Many people label an expensive item they buy as an investment either because they believe it is or simply to justify their purchase when in reality, they usually lose money over time on the purchase. This being said, investing can be a great tool for people to increase their finances when done strategically. As a new investor, you should first make sure that you are ready to begin investing (have a positive cash flow).
Many people think it is smart to jump into investing at any point in their life, no matter what their financial situation is. In reality, this is not the case. There are two steps that should be taken before the other three in order to have a noble investment strategy. Along with having a positive cash flow, these first few steps are the most important. Step 1 is that you should eliminate all credit card and consumer debt. Credit cards and consumer debt often have an interest rate of 12-28 percent, which will likely result in more money lost than an individual could gain through investing. In other words, by eliminating those debts you would be saving the money that you would be paying from the compounding interest. The next step is to save between 3 to 6 months (or more if desired) of living expenses in an interest-bearing account. This will serve as your emergency fund. If you ever find yourself in a spot where you need money for an unexpected major expense, you can borrow from yourself instead of taking out a loan from a lending institution. If you happen to use those funds, be sure to replace them as soon as possible. This allows you to feel more relaxed when emergencies occur. There will be many temptations as an individual works to complete these first two steps, but remember that it is important to create a strong foundation.
Step 3 is to save in an interest-bearing account for major purchases. This is the opposite of an emergency fund. This is for the major purchases that you have been planning for like automobiles, furniture, or even the down payment on a home. This will allow the money to continuously be compounding while you are putting money in over time. In step 4, one is reminded to diversify their investments in order to meet long-term goals. In other words, an individual should invest in multiple things like money market funds, CDs, treasuries, mutual funds, real estate, or even bonds for your long-term goals. A few examples of these goals would be retirement, college, a lake house, or a large vacation. This will provide a greater potential return to meet your goals. While there is a larger risk to some investments due to the unknown, diversifying can help minimize that risk. Finally, use investment dollars to complete long-term goals. This could mean investing in a hedge fund (a limited partnership of many investors that uses high risk in hopes of having a higher return), set aside money for a new business, or purchase raw land for future development. If you have made it to this step, all of your short term and most of your long-term goals have already been completed.
Most importantly, prayer should be a priority in your sequential investment strategy. God has a future planned out for you in His eyes and will guide you. As you think about what path is best for you as you consider investing, take a few moments to reflect on three vital questions: “why am I investing, what is my purpose (accumulation or preservation), and what would God have me do with this money both now and in the future?”
***To learn more, read Master Your Money by Ron Blue wtih Michael Blue