Investing for the first time is exciting, but before you part with any money, it’s vital that you take precautions to ensure you’re making smart decisions. Never rush into an investment without carefully considering your current financial situation and the investment details to ensure it suits your circumstances.
Here are three things you should check before you start investing.
1. Your Credit Report and Credit Score
It’s important to check your credit report and credit score before investing to get an idea of your financial health. Your credit report will list all the lines of credit you currently have open, and your credit score represents how well you manage your credit. A score of 670 or higher is considered good, scores between 580 and 669 are considered fair, and scores below 580 are considered poor.
A poor credit score doesn’t necessarily stop you from investing, but it does indicate that investing is unlikely to be a smart tactic. It’s usually far better to apply any savings you have toward paying off existing debts – particularly high-interest debts such as credit cards – so that you can reduce the amount of interest you’ll have to pay out overall.
2. Your Back-Up Plan
Every investor should have an emergency fund of liquid assets they can access quickly in the event of unexpected financial challenges, such as sudden unemployment, long-term sickness, or essential expenses like house repairs. Ideally, your emergency fund should be between three and six months of your living expenses.
Approximately 22% of Americans do not have an emergency fund, so they leave themselves vulnerable to serious financial problems should unexpected situations arise.
Before you commit to investing, check the health of your emergency fund and ask yourself if it’s sufficient should the worst happen. You should also consider how difficult it will be to get your money out of an investment before committing to it, just in case you need this additional cash to see you through an emergency.
3. Your Risk Appetite
Your risk appetite is the amount of risk you’re willing to take with your money. All investments come with a certain amount of risk, but some are riskier than others. Generally speaking, the higher the risk of losing your money, the higher the investment’s potential return.
Some types of investments, such as savings accounts, have very low risks and low rates of interest. Common types of high-risk investments are currency trading, REITs (real estate investment trusts), and IPOs (initial public offerings), all of which can offer big returns.
It’s important to balance your investment goals with your risk appetite, and it’s always better to be cautious, particularly when you first start investing. Ask yourself if you’re prepared to lose your money should it go wrong, especially if you’re considering high-risk investments.
Don’t Rush into Your First Investments
Investing can be a complex process, so take time to consider all your options. It’s not something that should be rushed. By carefully checking your existing level of financial health and your appetite for risk, you can make smart investment decisions and feel confident that your money is in the right place.