3 Investing Mistakes I Wish People Would Stop Making – Business Insider
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Investing is an important tool for building wealth, and helps your money grow faster than just saving. With investing, you can make your money work for you through compound interest. As a financial planner, I speak with countless people who are new to investing. Today, we have access to investing apps on our cell phones, and the process is so easy that it feels like a game. Between social media, online forums, and search engines, we have infinite amounts of information (and influence) at our fingertips. Cocktail parties and water-cooler talk are a thing of the past.
With increased access, it’s hard to decipher useful, valuable investment information from nonsense. Even when you find good information, it can be hard to understand what investment moves are right for you; this is where the mistakes — and sometimes regrets — come in. Whether you’re a beginner or you’ve been investing for some time, watch out for these common investing mistakes.
Before you dive into the world of investing, take a look at your current financial situation and make sure you’re covering the basics. Are you contributing to your 401(k) at least up to your employer match? People often skip this step, but it’s the easiest way to start investing. When your employer matches your contributions, this is free money and a guaranteed return on your investment.
Do you have cash set aside for a rainy day? Building an emergency fund should be a top priority. Your emergency fund is there to cover unexpected expenses or a job loss. Having this fund can help prevent unnecessary debt and added stress. When it’s time to dip into your emergency fund, you’ll appreciate having easy access to cash and not having to sell from your investments, especially if your investments have lost money.
Do you have high-interest debt such as credit cards or personal loans? Debt can be a drain on your budget. If you’re not aggressively paying down high-interest debt, the interest really adds up, and the balance can become difficult to pay off.
When deciding whether to pay off debt or invest, follow a general rule: If you can earn more interest from investing than you’re paying on your debt, it makes sense to invest. The average credit card interest rate is around 16%, and rates can go as high as 30%. While some investments have the potential to earn this much, you have to consider that these types of investments could be very volatile. In addition, paying down debt helps your credit score, which can affect many aspects of your finances.
Knowing why you want to invest and what the money is for are two crucial considerations. Will you need this money in the next few years — maybe to buy a home? Like an emergency fund, avoid investing cash that you’ll need to access in the next two to three years. You wouldn’t want to be in a situation where you need the cash and have to sell from your investments at a loss. If you’re saving for retirement and you’ve covered the basics, you have time to assume more risk with your investments.
In addition to the time horizon, consider the type of investment account. I always encourage clients to build investment assets in three categories, taxable, tax-deferred, and tax-free. Taxable accounts, such as brokerage accounts, are funded with after-tax dollars. You pay taxes on dividends and interest annually and capital gains taxes on any appreciation when you sell the assets. Tax-deferred investments include a traditional 401(k) and traditional IRA, while tax-free assets include Roth 401(k)s, Roth IRAs, and health savings accounts (HSAs).
Finally, what are your long-term goals, and how will investing help you reach those goals? How much do you need to invest over time? The category (or combination) of investment accounts to use and the types of investments will vary based on your situation. Answering these questions before you invest and having a thoughtful plan will help you stay the course.
You may be attracted to specific types of investments, like individual stocks, cryptocurrency, or rental real estate. When you haven’t covered the basics and have no long-term investment strategy, it’s easy to be lured by what appears to be quick and easy returns. But all investments have some level of risk, even the „boring“ ones.
To understand the potential risk involved in an investment, evaluate how much you can expect to lose, the opportunity for gain, and how easily you can get your money out of an investment. Don’t rely on stories and tips from friends, coworkers, or social media influencers. More importantly, if anyone promises or guarantees investment returns, run fast in the opposite direction! Do your own research and determine if a particular investment strategy is a good fit for you.
It would also be best to understand how much risk you can personally handle and how much risk is needed to reach your goals. Every person’s capacity for risk is different, and there’s no right or wrong answer for how much risk you should take on. If a particular investment strategy causes anxiety or keeps you up at night, it may not be suitable for you. You could have a high savings rate or a significant amount of assets. In this case, you might not need to take on a lot of risk to achieve your long-term goals. Just because you can earn more on your investments doesn’t mean you have to. Protecting your life savings is just as (if not more) important than growing it.
Investing is a great way to accelerate progress towards your long-term goals. Investing on a whim can cross over into gambling, and you have the potential of putting your life savings at risk. While investing mistakes are common, they can be easily avoided. Before you dive in, be sure to cover the basics, understand the risk, and most importantly, have a plan.
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