If you’ve spent months researching and reading material all about investing, you probably have analysis paralysis. Let’s step away from the reading material and build some clear, guiding goals. Read on to get a list of 5 important questions to ask before you start investing. These questions will help you map out your investing goals.
If you’re here, that means you’re already taking a powerful first step towards your wealth-building journey. You’ve probably googled a lot of questions by now, followed a bunch of personal finance Instagram bloggers, and maybe even read a book or two.
It’s time to stop researching and start investing.
Analysis paralysis is real. And as a first generation wealth-builder, you probably don’t have anyone to ask all of your investing questions to. Unless this is the first article you’re reading, you’ve probably done plenty of research already. While learning about the differences between a 401K and a Roth IRA, your investment options, or different brokerages are all important things to know about, Nathaly Minda from The Financial Talk gives us five clear questions to help guide our process.
1. What Are Your Investing Goals?
“I want to invest,” is not a goal. A good goal should be a SMART goal: an acronym that means Specific, Measurable, Achievable, Relevant, Time bound. Essentially, questions 2 – 5 are getting you towards creating your SMART goal. But start with this
- Are you trying to pay off debt?
- Do you have an emergency fund you’re trying to fully fund?
- Are you saving for retirement?
- Is your goal to create wealth?
Which of these resonate the most with you? Approach your investing journey accordingly.
2. How Much Risk Are You Comfortable With?
If you’re doing the research, it’s because you want to start. But have you created a clear goal of when you plan on starting? The more you allow analysis paralysis to set in, the more you’re prolonging your journey. If you’ve been on the research grind for a while now, ask yourself this:
What’s holding you back?
If it’s the fear of investing, then you should figure out what your risk tolerance is. All investments carry some degree of risk, the question for you is
“How much risk can you handle comfortably?”
A big part of that answer will be about your comfort with taking risks with your money. Your own risk tolerance depends on many factors, both personal and financial. If you’re new to investing, as a first step you should measure and learn about your risk tolerance before choosing the best investments for your financial goals.
Once you know how much market risk you can tolerate, you can invest in line with your values and comfort level, and build a portfolio that matches your risk profile. Take this risk tolerance quiz to determine your risk.
3. How Long Do You Want To Be Invested For?
This question is a little different than the previous one. While the first one asks about the timeline towards starting your journey, this one is about how long you want your journey to be. Personally, I believe wealth-building is a life journey, especially when you’re trying to build generational wealth.
But even in a life journey, you should still build milestones and a timeline that situates them.
If your goal is to build wealth to be able to retire, what is your financial independence number? I like using a compound interest calculator to estimate my financial independence number, which is another way of saying “the amount of money you will need to be able to retire.” But beyond identifying this number, how long you keep your money in the stock market is also dependent on the budget and lifestyle you want to create for yourself today.
4. Where Are You Going To Invest?
This might be one of the easiest questions on the list! And chances are, maybe you’ve already done this part of your research. What you’re looking for is a brokerage, which is what connects a buyer (you) and sellers (the New York Stock Exchange). The brokerage that you choose depends on the investment product that you are looking for.
Here at Yo Quiero Dinero, we believe that you have everything you need to create your own portfolio. While a certified financial planner can guide you through some of your financial goals, books like The Simple Path to Wealth argue that you can build your own wealth, without having to pay portfolio managers high account management fees.
Be sure to check out discount brokerages like Fidelity, Charles Schwab, and Vanguard, which are some of the top brokerages out there. You can also use newer investing apps like Public!
5. How Much Do You Need To Invest To Reach Your Goal?
Financial independence is a goal for many; that is when you’ve saved/invested enough money to not work anymore. Sounds amazing. doesn’t it?
In order to determine how much money to need to invest to reach your goal, you first have to calculate what your life costs and what you estimate it will cost in retirement. The most common rule of thumb is that the average person will need approximately 80% of their pre-retirement income to sustain the same lifestyle after they retire. In other words, if you make $100,000 now, you’ll need about $80,000 per year (in today’s dollars) after you retire, according to this principle.
However, there are several factors to consider, and not all of this income will need to come from your savings. With that in mind, calculating your FIRE number is a good place to begin.
Especially when you start, it might be hard to see your investing contributions as something impactful for your future. It might even feel like yet another one of your expenses. You’re contributing your hard earned money. Understanding your why behind you contributing your hard earned money into accounts you might not be able to touch for a few years will be key to the sustainability of your journey.
Investing is a journey. When something is a journey, it’s impossible for you to be an expert. Contrary to what you might feel, you probably already know more than enough to start your journey. So go through these questions, but especially focus on your why.
Understanding your why is ultimately what will give you the confidence to start your wealth-building and investing journey as a first generation wealth builder. These are important questions to ask before investing, so you can be 100% clear on your goals!
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