When you have free money that you don’t need at the moment, you can handle such money in either of two ways—or both: by saving and by investing.
You may be accumulating your extra cash with the aim of buying something later in the year, such as a new car, a new HD plasma TV, or a new set of furniture. In this case, you need to keep your money in a savings account. This will earn you next to nothing—or nothing—in interest, but you can rest assured that your money is safe until the time is right for the purchase. So, if you have a short term goal for saving, a savings account is a good place to keep your money.
But if you need to save your extra money for a long term goal, such as retirement or child education funds, then you can consider putting it in a place where it can potentially earn more money. This is investing. As with any other crucial decision, investing your hard-earned money requires adequate planning. This is how an investment plan is come about.
While making your investment plan, there are certain factors you must consider, to avoid making wrong investment decisions. Here are 10 such factors:
10 Factors to Consider When Making your Investment Plan
1. Your objective for investing
One of the ways to determine where to invest your money is your objective for investing. If you want to grow your money fast and do not mind risking it because you have enough time to recover from a downturn, then you can consider taking aggressive risks for higher gains. But if you are already close to retirement, you sure don’t want your money to decrease in value just when you are about to retire. So, you should consider investing in less risky investments such as bonds.
It is also possible that you have two different goals, such as investing for a car down payment (short term) and investing to retire or for child education (long term). In this case, you can split your money in two different investment programs.
2. The risks involved/how much risk you can take
While investing comes with the potential to multiply your money and fetch you huge profits, it equally comes with the risk of losing your hard-earned money. This is why it is generally recommended that you invest only money that you can afford to lose.
3. The right time to invest
While investing might be an alluring option, there is always a right time for it. Invest at the wrong time, and you will bite your fingers in the end. For example, if you have a huge pile of debt, then it makes sense to pay off at least some of it before investing. Remember, retrieving invested funds isn’t as easy as withdrawing funds kept in a saving account. So, you want to think twice before locking up all your extra money in an investment.
4. Your age
Yes, your age is another factor you should consider to determine where to put your investment and how much to invest. In investing, being young has an advantage. You are able to wait a longer time for your investment to bear the fruit (remember, it takes time for investment to yield profits).
At a young age, you are also more secure because you have less responsibilities, more disposable income, and you can pick yourself up easier when you make mistakes.
5. How soon you will need the money
How soon you will need your money will also determine where to invest and how much to invest. If you plan using the money for retirement, then you can invest a little amount over a long period—if you are still young. But if you are already close to retirement, then you might want to consider investing a bigger amount in a high-yield investment program or scheme.
The more desperate you are to make quick returns on your investment, the more likely you are to fall victim to fraudsters. So, you want to play safe by either staying away totally from all investment opportunities that sound “too good to be true” or conducting an extensive background check before grabbing any investment opportunity.
7. Your emergency fund
How much you will lock away in your investment portfolio depends on how much you want to have in your emergency fund. Having an emergency fund is more than necessary because it will cater for any unforeseen expenses that might surface. The more money you need to keep in your emergency fund, the less money you can invest.
8. How you will diversify your investments
While you might be tempted to invest all your money in a high yield scheme, one of the most important ways to reduce the risks of investing is to diversify your investments. It is common sense: don’t put all your eggs in one basket. So, when making your investment plan, you need to decide which “baskets” you will put your “eggs” in, and how many eggs you will put in each basket.
9. Market or industry growth potential
Some markets or industries—such as transportation, health, and food–will forever remain profitable. But some industries—such as technology—could be quite volatile. Once a new aspect of technology succeeds an old one, all investments in the old one cease to fetch profits. While transient markets can be very profitable, only invest in them if you are investing for the short term. If you are investing for the long term, consider the evergreen markets.
10. Your exit strategy
Whether your investment brings the results you need or not, you will eventually need to recover your money. When and how you will do this is totally up to you to decide. And this should also go into your investment plan.