How and when should you start investing? Emergency fund, if you have never heard of it, these are savings for an uncertain future. Something may go wrong, lose your job, something expensive in the house breaks maybe get into an accident! This money is used only during emergencies.
Since investing has risk, a chance that you may not get your money back becausewe cannot predict the future with certainty. There’s a certain comfort in knowing you have at least six months’ worth of living expenses kept somewhere on in a bank account. It helps you take more risk. Remember, the higher the risk, the higher the return. After getting your emergency fund in check (assuming you do not have debt) now it’s time for you to start investing.
Do you want passive or active income? The former is one that does not require significant time and energy for you to receive. This can be done through loaning a business money, buying shares in a business, employing other people and putting systems in place so your business can run without you. Active income is that which requires significant amount of energyand time for you make it. This is hard to increase because it means increasing your skill set (which is not a bad thing) and putting in more time.
The next step is to seek knowledge, do not just invest in something because your friend is making a lot of money from it. They may not be telling you all the bad things about it. Do market research about the cost of entry, your customers (who will help
you keep in business), competition. How much risk is too much for you? How long do you want to keep your money tied up for? Educate yourself so much that you can explain it in your local language. All of this research is to enable you choose what is best for you.
As you pick and choose, remember investing is for the long term, only invest what you are comfortable losing and constantly seek knowledge.
Below are 5 questions to help you assess your risk tolerance. Each is rated by;
- Strong Agree
- Strongly Disagree
- Investing is too difficult to understand.
- I am more comfortable putting my money in a bank account than the stock market.
- When I think of the word ‘risk’ the term ‘loss’ comes to mind.
- Making money in stocks and bonds is based on luck.
- In terms of investing, safety is more important than return.
If you ended up with mainly strongly agree you are risk averse than means you do not like taking risk. If more were on strongly disagree, you are risk seeking. If more neutrals then you are risk neutral, you would rank investments basing on return and not risk