Before investing money, every person and business should do three things.
First, create a fully funded emergency savings account. This means having 3-5 months of expenses saved up. When calculating this amount, be sure to include your medical and auto insurance deductibles! Starting with these good financial habits – like saving – will build into your success of increasing your wealth.
Next, you should be contributing about 10-15% to a retirement account (this can include employee matching contributions, which is nice right?!) and, lastly, you should not be paying interest on credit card debt. With this foundation in place, you’re ready to start investing and increasing your overall wealth.
[Insert high fives and clapping here. I’m doing it with you.]
I’m here to help you on your journey to build wealth. Here’s how.
How to Invest Money to Build Wealth in 4 Simple Steps
- Step 1: Define Your Risk Tolerance
Investing is often an exercise in being honest with yourself. One of the biggest mistakes I see individuals make is thinking that they love the prospect of taking tons of risk with the hope of great returns. Then, the economy takes a downturn and their account goes deep into red territory. Feeling defeated, they sell their assets at rock bottom prices and realize a significant loss. There are plenty of risk tolerance quizzes out there. Take a few, and be truthful to yourself if you’re prepared to watch your investments rise and fall with the market.
- Step 2: Define A Crystal-Clear Goal
With your risk tolerance clearly defined, now you need to set a clear goal for your investing decisions. Ask yourself these questions: What are you building your wealth to? Is it something material like a house or boat? What is the cost of that? Are you building for an income stream? By setting a clear goal, you set the foundation on which you can make decisions regarding what assets to buy and when to sell.
- Step 3: Choose an Asset Allocation
Asset Allocation simply means choosing what percentage of stocks, bonds, real estate and other securities will make up your portfolio. Historically, stocks have averaged an annual return of 8-11%, but can carry the most volatility. Ramping up or reducing your exposure to stocks is a great place to start when picking your asset allocation.
- Step 4: Select Securities
With everything clearly defined, you’re now ready to pick and choose the securities to fill your portfolio. Stocks can be purchased individually or in baskets such as ETFs and Mutual Funds. The same goes for bonds and real estate. I encourage you to take the time to study and research each stock and fund you purchase. I spend an average of about 100-200 hours of reading and wait several years before I will purchase an individual stock I have just learned about. Evaluating a fund involves careful analysis of the entire fund portfolio, including the managers who oversee that fund.
Try this — I recommend first making a practice portfolio. Find the securities that you would purchase and follow them throughout the year. Keep track of how much you would’ve invested and what you would’ve gained or lost. This is a good way to gauge how you did over the year without any real risk. I know you want to know how to invest money, but if you’re wary, this is a great way to start.
Before you jump head on into investing, make sure you have these 4 simple steps on how to invest money in your pocket. Mastering your money can come down to establishing and executing just these 4 smart habits.
Sound overwhelming? Not as well-versed in the world of finance as you’d like to be? Let me help you achieve your financial goals! Getting started working with me is as easy as requesting to meet. Let’s meet!