Last time I shared with you the 3 questions to ask yourself BEFORE you start investing. Yes, financial success requires CLARITY and INTENTION. Today we’re going to dive deeper into the first question…
To answer this question, you’ve got to answer the following 5 questions (yes, asking the right questions is the key):
Let’s look closer at each of these questions together, then you’ll do your own financial assessment. Ready?
Your ROI (return on investment) will depend on several factors like the kinds of assets you invest in (aka asset allocation), market performance, economic environment, etc. In this low interest rate environment, making on average 7-8 % over longer time period (from now to your retirement) is considered a pretty good ROI.
So, if your hypothetical investment has an ROI of 7-8% but the debt that you carry (e.g. credit card debt, lines of credit, etc.) is higher than 7-8%, then it would be very smart for you to pay off the debt before you consider any investment. Interest accrued by the outstanding debt most likely will surpass potential interest earned from investing!
It doesn’t make sense to pay more to carry your debt than what you would earn by investing your money. Agree? Use the money to pay off you high-interest debt (mortgage rates are usually lower than your average ROI) before you consider ANY investment.
An emergency fund (or 911 or SOS fund) is ‘safe money’ that you accumulate and keep in a bank account. This is money that would ‘have your back’ should unexpected hurdles happen – you lose your job, your business has cash flow problem, your house needs urgent repairs or you incur a significant medical expense.
The key here is to keep your money SAFE (in cash or treasury notes). If you have to deep into this fund to pay for urgent financial needs, make sure you re-fill this fund asap before you start investing. Even if you are paying off your high-interest debt, I highly recommend that you contribute some percentage (e.g. 10 %) of your income toward your savings.
How much should you keep in your Emergency fund? Great question. My answer is the usual – It depends! I recommend to keep at least 3-6 month worth of your living expenses. The rational for 3-6 month is because it may take that much time for you to get a new job or fix the problem with your business.
Personally, I like to keep up to 12 month in my emergency fund. If you invest without having the ‘safety net’ and will need money for urgent needs, you will be under tremendous stress because you will need to liquidate your investments in a hurry and, possibly, take a loss on your long term (5 years +) investment.
I see investing as a great tool to augment wealth but I will never play with my safe money on the market.
Investing in the stock market works best when you are willing to stay in the game for a longer period of time. Most of the time, day trading or short-term investing is not profitable and you hardly get any income from the dividend-paying stocks.
Therefore, before you start investing, I suggest that you have a clear idea that you will not rely on these money for at least 5 years or so. I don’t believe that you should invest in the stock market the money that you may need within next 2-5 years.
Stock market investments go up and down and you need to be able to ride the market trend! It’s hard to time the market, even for professionals. You don’t want to be forced to sell your investment at the worse time!
Besides, stock market in general usually comes back in a long term. In 2007 the market was hot in the US, then in 2009 the stock market as well as real estate market in the US tanked. Both recovered in a few years and kept rising but you would have to stay invested in the market to wait for the recovery.
You don’t want to be in a position when you have to sell your investment – you want to buy low and sell high, not the other way around, agree?
That’s why your money for short-term (less than 5 years) goals (e.g. a down payment on your new house or college tuition or car purchase) should be held in a saving account, money market account, or treasuries (e.g. treasury notes or bonds).
Frankly, it’s not enough to ‘want to invest’. You can’t just jump into the stock market – you need basic financial education. Besides, you should NEVER invest all your investment funds in the market. You want to invest strategically and wisely. I am talking about being clear how to diversify and allocate your investment money.
Diversification and asset allocation are two important risk management factors you must be aware of. And to determine the right asset allocation for your financial situation, you must get clarity about your financial goals, your investment time-frame, your risk tolerance and preferred investment assets (e.g. stocks, bonds, mutual funds, exchange-traded funds, real estate, precious metals, business ownership, etc.).
These specific factors can be discussed with your financial adviser and they will help you determine how to diversify your money among various investment choices.
This question is a ‘gut check’: If you’re a person who’s uncomfortable with ANY level of risk, investing might not be for you. ANY investment involves risk. You can choose to be conservative with your investments if your main objective is to preserve your principal or choose more risky investments that that have higher returns.
How would you feel if the value of your investments went down a little? And what if it drops a lot and stays down for a while? These are real possibilities you must be aware of and not lose sleep over.
I like to say that you should invest at your ‘sleep well’ point, meaning chose the investing options that would allow you to keep peace of mind.
BOTTOM LINE: SAVING is planting the wealth seeds. Investing is the fertilizer to help your wealth grow faster. While the fertilizer is optional, seeds are not. Whenever you get ready to start investing your money, do it in a way that you won’t lose sleep over it.
Your investment portfolio must reflect your long term goals and risk tolerance, which usually change with time. If you’re not comfortable with investing now, no worries, take your time to educate yourself first! Yes, investing is very important, but it’s even more important to get your financial house in order first.
And if you want to brainstorm your specific financial situation and see what steps you can take immediately to start moving toward to YOUR financial goals, schedule a strategy session with me to get you going.
To Your Health, Wealth and Freedom!
With Love and Gratitude,
Millen has a way of opening up conversations that not only make you feel safe to talk about money, but her questions have been so profound that they have made immediate shifts in my mindset and my circumstances have changed almost immediately too, including more money showing up, but more importantly, more and more opportunities. I have found new and inspired direction, and am feeling a lot more peaceful and excited about life in general. Millen offers so much value and a solid advice! She is a big picture thinker and it is infectious! Thank you, Millen, from the bottom of my heart and the top of my soul.
Millen Livis is a gift to humanity. Millen is very generous with her time and energy, sharing her vast life experiences and strengths, empowering me to become a better human being. Millen has impacted my life spiritually, emotionally, physically and financially, by her encouragement and clarity. I have not said, “Thank you!” enough.
Millen brings together an interesting mix of feminine wisdom, clear logic, assertiveness and humility in all of her interactions. With her warmth, intelligence, diverse experience and passion for ‘Dare to be the best you could be’ message, she inspires other women to reach for the goals they set for themselves.
Using laser like energy, Millen gives her full attention to your issue and stays with it until a satisfactory resolution or conclusion is reached. Open minded, yet direct and honest, Millen balances objectivity with compassion. It is a joy to work with her!
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