5 Critical Factors to Consider Before You Start Investing
October 29, 2013
When you have fully funded your emergency fund, you are ready to invest. Where and how you invest the money is dependent on five critical factors:
- Risk Tolerance
- Time Horizon
- Investment Experience
- Tax Profile
What is your objective?
Is the money you are investing for yourself or for your children?
Is this for retirement or to create extra income? Are you saving for a house or your kids education?
Are you willing to tolerate a lot or very little risk?
Are you able to tolerate a lot or very little risk?
Your willingness to take risk may be high, but if you are in retirement your ability to take risk is low. On the other hand, if you are not in retirement, have a stable high paying job, and a long time horizon, your ability to take risk is high, but your willingness to take risk might be low.
If your answers to both of these questions do not match, I would recommend compromising somewhere between the two.
Do you have a long, medium or short time horizon?
How many years do you expect to invest without withdrawing any money?
Is there a decent chance that unexpected events will deplete your emergency fund? Are you self-employed? Do you or one of your family members have a serious medical condition?
How much investment experience do you have?
What types of investments do you have experience in?
Are you willing to spend time in educating yourself about investing?
What is your marginal tax bracket?
What is your household income? Am I qualified to contribute to tax efficient investment vehicles such as an IRA?
In retirement, do you expect to be earning more or less than you are currently earning?
Before you start investing, you need to ask yourself these questions so you can create an investment strategy that is appropriate for you. If you need help, don’t hesitate to ask for help from a competent financial advisor.
Can you think of any other questions or considerations that would be helpful for you to think about?