Investment beginners often worry about factors to consider before making investment decisions. However, the precautions make most new investors stray away from stocks, dividends, real estate, etc.
Fortunately, a few factors can help new investors to make better decisions and diminish fear of losing money with their option. These include doing a personal financial audit, understanding the risks of the return, setting aside an emergency and rainy day funds, existing debt, etc.
Besides this, investors must consider financial goals, diversified portfolio, short and long-term approach, charges, etc. Such details even help experienced investors to make better decisions.
5 Factors to Consider Before Making Investment Decisions
● Personal Financial Audit
The primary objective of a personal financial audit is to ascertain current monthly income, expense, emergency, and rainy day funds. Besides this, the audit would help to distinguish between temporary and permanent monthly expenditures.
For example, costs for utilities and food can become unavoidable. However, the latter can decrease by switching the supermart, availing coupons and offers, etc. On the other hand, utility costs can diminish by switching the service provider or taking better plans.
Additionally, income from interest on savings accounts and availing government benefits would also account in the audit. Meanwhile, bank charges, late payment fees, default charges, etc., would account under expenses depending on a monthly, quarterly, or yearly basis.
The personal financial audit would help to separate an amount for starting investments. It would also help to diminish expenses and increase the investment amount in future. For example, cancelling a subscription or membership would reduce monthly household costs.
● Rainy Day or Emergency Funds
New investors should never consider investments as a rainy day or emergency funds. Making long-term investments would prove much more useful. An investment beginner should at least make five-year plans.
However, before making long term investment decisions, it is crucial to set aside money for rainy day or emergencies. These help to cover unpredictable costs assist during a job loss or a financial crisis.
Keeping a separate account for investments and emergency funds would prove much more beneficial. The latter can even help to support a child during college or fix a leaky roof. Moreover, it would help to reduce the stress of borrowing money during such circumstances.
New investors should avail loans for bad credit with no guarantor, debt consolidation loans, payday loans, etc., to reduce existing debt. This step would help to invest more and create higher emergency funds.
Before investing, it is necessary to ensure that family members and assets remain protected. These will help to reduce the financial stress if a problem arises. For example, if a breadwinner undergoes an accident, becomes sick, or dies, the insurance would help to cover expenses.
Moreover, the right insurance can help to recover financially during prolonged employment breaks. Besides this, renewing insurance is less costly than recovering the new expenses. Therefore, it proves beneficial for protecting the family and assets in the long term.
Therefore, before making investments, it is crucial to make insurance decisions. After that, comparing the benefits and drawbacks offered through each insurance would help ascertain the correct choice.
Moreover, it will diminish the financial stress of the breadwinner during unemployment or other monetary crisis. Additionally, it would not require diminishing savings or suffering losses by withdrawing investments during emergencies or unpredictable circumstances.
● Personal Advice
Another factor that can influence investment decisions, especially for beginners, is personal advice from an industry professional. The advisor can help to find the right investments based on the risk level.
Besides this, the advisor can help to diversify the portfolio. The professional can even inform about missing investments that can provide good returns at the interested risk level. Moreover, it is unnecessary to take advice from a professional for all investments.
However, sound advice from a professional at the beginning or risky investment could prove useful. It can help to avoid making rash or impulsive decisions. Besides this, investments either increase or decrease in value. Taking advice can help to withdraw them if the circumstances for the latter arise.
● Risk Level
An important factor that often influences the returns is a risk of an investment. Lucrative options often have a higher risk than others. Moreover, investors receive steady interest on investments through sturdy savings accounts.
Savings account in a bank and financial institution also safeguards agreed APR and invested amount. On the other hand, investments rarely guarantee the return of invested capital and come with different risk levels.
Therefore, the investor must be willing to lose money through high-risk investments if the market circumstances change. However, if everything goes as mentioned, the investor would avail high and expected returns.
So, investors must decide the interest in risk level before making a final decision. Additionally, investors must decide the cost of an investment. It includes fees of a service provider that often charge upfront, unlike commissions.
The charges might consist of initial deposit fee, charges of individual transfer or deal, and annual administration costs. Fortunately, online trading platforms can help in avoiding certain charges. However, they may lag in broker advice and lead to unpredictable circumstances. Lastly, investors must decide the most suitable form of investment through comparison platforms and offline sources.