By the time you enter the workforce and start making money, you should already start thinking about where and how to maximize your investment vehicles. Whether you’re a freelance writer, full-time employee, or business owner, making your first investment can get you closer to your financial goals.
There are many investment vehicles to choose from, such as stocks and bonds, real estate, ULV insurance, mutual funds, and many more. For many people, creating an effective investment strategy can be overwhelming. Some want quick returns and forget that there is a life ahead of them to run their investments and other resources, while others are content with having bank accounts that make little or no profit.
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In May, value investor Mohnish Pabrai participated in a question-and-answer session with MBA students from London Business School, who interviewed the investor on many different topics, including his experience in managing his own business in the 1990s. Letters, lectures and the like on second quarter 2021 hedge funds Owning a business and being an investor Pabrai told his Read more
But when it comes to investing, it’s not about where to invest your money, but which investment vehicles are right for your financial situation and personal goals.
Before investing: Factors to consider
The key to becoming a smart investor is to match your resources, requirements and priorities for a particular period or stage in your life. This means that your investment decisions will need to be based on several factors including your monthly income, assets, expenses, financial goals, and risk appetite for investing, among others.
Since investing can take a huge chunk of your finances, you need to check your cash flow. Do you have a regular office job or a thriving business that provides you with a steady source of income? With the income you get, do you still have excess cash left that you can use to invest? It is important to ask these questions because they allow you to set appropriate expectations regarding your financial responsibility as an investor.
It is also advisable to take stock of your short-term financial situation. Ideally, you should have saved six months’ salary to help minimize the impact when your ability to earn – and therefore invest – is affected by economic factors or personal emergencies. It is simply not wise to get into investing when you are having financial problems, especially when there is no real guarantee that your return on investment (ROI) will be quick. The idea of investing is to part with the money, which you can afford not to use or spend for months or years.
Your willingness to invest may also depend on how much you pay your billers to cover your monthly expenses, such as housing, education, transportation, food or groceries, etc. Apart from that, you also need to consider your lifestyle and personal expenses. If you spend more than what you earn, it is a red flag that you are not in a healthy financial situation and may not be ready to invest.
Here is an example of the recommended expense-to-income ratio for various types of expenses:
Lodging: 20% to 25% of your income
Transport: 15% to 25% of your income
Living allowance: 20% to 25 of your income
Debt payments: 5% to 10% of your income
Savings: 10% to 15% of your income
When it comes to your financial goals, you can tap into your investments to help you achieve those goals. If you are a new parent, some of your priority goals may be to buy a house, establish your child’s education fund, and make sure you have cash readily available in your bank account.
In this case, you would do well to place your assets in different investment vehicles. It helps you manage the risks involved in investing and hence gives you a better chance of achieving your goals as the money you have invested begins to grow.
Speaking of risk, this is another factor that you should consider when deciding to invest. Since almost all forms of investing involve risk, you need to consider whether you are open to the prospect of your investments depreciating at some point. This is called your risk appetite. If you are not too comfortable with the idea of taking possible losses, then you will need to be careful with your investments. Consider lower risk investments.
Your timing for investment vehicles can also influence the level of risk you are willing to take. Generally speaking, your risk appetite decreases with age. If you start building your investment portfolio in your twenties, you will have more time to recover the money you might lose than if you choose to invest as you approach retirement.
In which investment vehicles to invest?
Once you have evaluated the various factors described above, the next step is to choose the right investment vehicle. This is one of the biggest dilemmas investors face, especially if you are just starting out. You might find the decision-making process easier if you first align your goals, and from there, compare the investment vehicles that might fit your timeline.
You are likely to set goals for the short, medium, and long term. Naturally, each of these will require investments aligned with a different set of factors, such as interest rates, liquidity period, and the overall value of your hard-earned money.
For short-term goals, the most common types of investments may include term deposits, liquid funds, or short-term debt funds. In the meantime, you can opt for balanced funds and equity-linked savings plans for your medium-term goals. Obviously, your long-term goals will give you the widest range of options, from stocks and bonds to real estate.
Indeed, investing your hard earned money is a major endeavor that requires a lot of homework, careful planning, projections, evaluating your options, etc., to make your money grow over time. In our featured infographic, we discuss more of the things you need to consider, so that you can get a clearer perspective on investing at any stage in your life.