Regardless of how much or how little money we have invested in banks, mutual funds, or other types of accounts, we want to invest our money in the wisest way possible. Knowing the rights and wrongs of investing is vital to our long-term financial well-being. Few people have so much extra money that they can afford major or frequent investing mistakes. Let’s answer “yes” or “no” to the following questions. The more “no” answers, the more we need to find out about investing.
- Do we understand the investments we currently hold?
- Is the money that we need to tap in the event of a short-term emergency in an investment where the principal does not fluctuate in value?
- Do we know what is the income-tax bracket and we are factoring that in when choosing investments?
- For money outside of retirement accounts, do we understand how these investments produce income and gains and whether these types of investments make the most sense from the standpoint of our tax situation?
- Do we have our money in different, diversified investments that aren’t dependent on one or a few securities or one type of investment (that is, bonds, stocks, real estate, and so on)?
- Is the money that we’re going to need for a major expenditure in the next few years invested in conservative investments rather than in riskier investments such as stocks etc.
- Is the money that we have earmarked for longer-term purposes (more than five years) invested to produce returns that are likely to stay ahead of inflation?
- If we work with a financial advisor, do we understand what that person is recommending that we do, are we are comfortable with those actions and that advisor, and is that person compensated in a way that minimizes potential conflicts of interest in the strategies and investments he recommends?
Making and saving money are not guarantees of financial success; rather, they’re prerequisites. If we don’t know how to choose sound investments that meet our needs, we’ll likely end up throwing money away, which leads to the same end result as never having earned and saved it in the first place. Worse still, we won’t be able to derive any enjoyment from spending the lost money on things that we perhaps need or want.