Ever wondered how things get done? Like how that new home product got launched in Wal-Mart or how that new building a couple of blocks from you got built? Most things get done through projects and the process by which projects are executed is referred to as project management. Planning is a very critical part of project management.

Remember the 80-20 Pareto principle, which states that in most events, 80% of effects occur from 20% of the causes? Well, this is also applicable not only to project management but also to investing. A 20% failure in the planning part can cause an 80% failure in the execution. And mind you, people do not take 80% failures lightly.

We all know what the Eiffel Tower is and where it is located. This beautiful structure is in the most romantic place on Earth – Oui, Paris! – Quite hard to miss! Anyways, did you know that the conceptualization of the Eiffel Tower took place in the year 1884 but the actual construction started only in 1887? What happened between those three years? Planning happened. Of course, enough prep should be done, like blueprinting, securing funding, stuff like that. Otherwise, it would have not become that majestic piece of art that it is now. A few roadblocks were encountered along the way, but oh well, C’est la vie!

So, what is our point here? The fact that you are reading this now means you most likely are planning to invest. Like any other project, investing has prerequisites and needs proper planning. And you’ve come to the right place, my friend! We’re here to outline your checklist before you start putting your bucks to investing.

pre-investing checklist
Note: Some of the elements used in the illustration were obtained from Freepik.com.

Establish Your Emergency Fund

When life throws you lemons, you make lemonade better be prepared for it. Of course, you’ll never know what will happen in the future. Establishing your emergency fund makes you financially ready for unexpected expenses that may occur in the future.

A common rule of thumb in putting up your emergency fund is to have three to six months worth of living expenses set aside that you have quick access to in time of need. You may either put this money into a saving or checking account or a money market fund. Another less desirable option is to borrow against your employer-based retirement account or home equity during time of need.

Of course, your rich family member is also a good source for an emergency fund (Yes, we’re serious). But not all of us are blessed with wealthy parents or siblings who would be willing to take us under their wing in times of financial need so better stick to the safe side and DIY.

Evaluate Your Debts

The concept in this one is quite simple. Before you put your money into investments, you better pay your debts first. If you’re a huge Game of Thrones fan (like we are) then you know that a Lannister always pays his debts. So, why don’t you go be a Lannister and do the same?

Now, in order to evaluate your debt, you need to know the types of debt that people usually get themselves into. The first and most common type is consumer debt. Consumer debt encompasses credit cards, auto loans and all other debt incurred by the consuming public.

This is considered as an expensive way to borrow money because interest rates charged are relatively high. This is because, well, consumer loans tend to be risky. Case in point: We all know one person who doesn’t pay their credit card bills. Reducing and eventually eliminating consumer debt through your savings account will be beneficial to your long-term financial health as it will dramatically reduces those high interest expenses you keep paying every month. Nice!

The next common type of debt we usually incur is our mortgage. A Mortgage is debt secured with collateral, usually real properties. Now you do not necessarily need to eliminate your mortgage payments before you invest, you just need to mitigate them. Mortgages have lower interest rates and when used properly, it can actually help you achieve your financial goals.

When evaluating whether or not you should pay off your mortgage faster, you must also consider your investment’s rate of return. For instance, if you have a fixed-rate mortgage with a 4% interest rate and you decide to invest rather than pay off the mortgage faster. The return on your investment must surpass 4% or it’s not going to be worth it.

Know and Establish Your Financial Goals

Investing is primarily finance-driven. People engage in investing to help achieve their financial freedom. Whether it’s saving up for your kids’ college tuition, travelling the world or saving for the ultimate retirement experience, your financial goals greatly impact your investment style, approach and decisions.

Knowing your financial goals directs you into the right path since it enables you to be cognizant of how much you want to earn and how soon you need to earn it. Your financial goals also impact your risk tolerance.

Shape Up Your Retirement Accounts

You’ve heard about IRAs, ROTH and 401k’s before, for sure! These are examples of your retirement account options. Most people neglect retirement accounts because they get so engrossed with investing. This is a crucial mistake. Retirement accounts provide a lot of tax benefits. For one, your contributions to your retirement accounts are generally tax-deductible to your federal and state income taxes.

The sooner you start to put your money into your retirement accounts, the more you can save and collect in the future. Why? Because of this thing called compounding. Basically, what you contribute to your account earns more capital, and then these earnings are added to your contribution in computing for subsequent earnings and so on. Major “earn-ception”, right?

Know Your Investment Options and Optimal Investment Mix

Before investing, you must know what you’re getting yourself into. Therefore, you have to familiarize yourself in the concepts behind your investment options like stocks, bonds, cash and cash equivalents, and alternative investments. This way you can determine the optimal investment mix fit for your capacity, goals and risk tolerance.

When looking for the right investment mix, you should take into account factors such as your age, disposable income, risk tolerance and your goals.

Protect Your Assets

Before you attempt to expand your assets through investing, you should protect existing ones first. How do you do this? By ensuring your assets have enough insurance coverage. Basic insurance coverage is, at a minimum, medical health insurance, liability insurance in your home and car, disability insurance and life insurance.
 

Previous | Next