You may be the most intelligent person in your circle of friends, but will you make the most profitable investment decisions? Well, in all honesty, there is no guarantee. Want us to prove this statement for you? Sure, we will do that. Let us take you back in time.
All of you may know of Sir Isaac Newton and Albert Einstein. There is probably no one smarter than them. Despite that, these two gifted minds made incompetent financial decisions. When Einstein was awarded a Nobel Prize, he received a lot of money with it. He invested a considerable chunk of his money in bonds, and what happened is that he ended up losing a lot of this money due to his poor investment decision. The same thing happened with Isaac Newton. He invested a good chunk of money as an investment in the South Sea Company’s stock. Unfortunately, the company’s bubble burst in 1700, and Newton lost a lot of money.
When these two brilliant men made such poor investment decisions, what is the assurance of your safety? Sadly, there is none. But always remember, knowledge is power. So, being aware of what to do can take you a long way. Here, we will discuss some essential tips and tricks that can help you make a sound business decision.
Before we get to that, let us share with you a general rule of thumb.
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1. Budgeting Rule
As a general rule of thumb, you need to follow a simple budgeting rule all through your life. As part of this, you need to divide your earnings into three parts. The first part comprises half your earnings, which you can use for meeting your day-to-day expenses, shopping for your essentials, and paying for the utilities. The next part shall consist of twenty percent of your earnings. This is the part that you save and invest as per your financial goals and priorities. Lastly, the remaining thirty percent of your earnings can be used for maintaining a lifestyle.
Now, let us take it forward and understand some crucial things that you need to bear in mind before you make any investment, big or small.
2. What is your financial standing?
Before you begin investing your money, you need to have a concise picture of all your funds. Primarily, people’s goal when they invest money is to see good returns or make a profit. An essential prerequisite before you start investing is knowing the exact amount of money you are ready to invest and whether or not there is a requirement for you to skimp, comments Jocelyne, a service provider with TFTH who offers assignment help in Brisbane. Well, this process is much similar to preparing a budget. So, sit down with a pen and paper, write down all of your income sources, such as your salary, Fixed deposit interest, bonus, or incentives. Further, if there are any other income source, mention them too. Next, you need to carefully divide these amounts depending on the frequency at which you will be getting them, annually, monthly, or weekly.
Once done, take out your bank statements for the last six months. From there, note down all of your expenses. This should include the utilities or the bill payments, fixed expenses, like EMIs or rent, and the payments made towards groceries. Next, include your half-yearly or yearly expenditures, such as gym memberships or family vacations. Doing so, you will have a clarity of your annual expense, and their frequency, and vitality.
Next, you need to divide and categorize these expenses as an essential expense or the non-essential expense. You can do nothing about the essential expenses, but for the non-essential expenses, you can cut corners, which can help you elevate your savings, which can result in more significant investments.
3. What do you want to achieve?
The next thing you need to do is being self-aware of the goal that you aspire to achieve. There are several things that we hope to achieve or buy during the course of our life. For instance, you may want to buy a new car, a house, an expensive premium watch, a solitaire ring, travel around the world or purchase something grand for your parents. A lot of your dreams can be materialized by thinking of them as investment goals. So, next, you need to plan things in a way that you achieve this goal as per plan.
There are several aspirations or dreams common to all individuals, such as saving to provide for better education of their child, saving a reasonable degree of funds for a decent life after retirement, among other things. There are also a few individual-specific goals, such as attending a Beyonce concert in the front row or buying an Audi.
The knowledge and awareness of the reason for an investment help you stay motivated to work towards that investment, comments Conner, an educator who works with a TAE, a platform where you can buy assignment online. Further, it would help if you had clarity on the amount you will need for this goal. This will help you decide the term and the degree of investment.
4. Understand your risk tolerance
An important prerequisite before making an investment is examining your risk tolerance, comments Harry, an online PHP tutor with FineGrades. There are certain investment prospects, which will yield higher returns, but the risk factor may be more. For instance, even though mutual funds yield greater returns, they do have a higher risk factor. Alternatively, FDs, though have a low return, but there is almost negligible risk involved in it. If you take more risk than you can tolerate, you may feel anxious all the time. There is no point losing your sleep in the present to secure your future.
5. Diversify your portfolio
The best way to stay safe while investing is starting with assets, which require minimal initial investments, such as FDs or any other small saving scheme. If you want to invest in liquid assets, you may consider ETFs or SIPs. Regardless of the option you pick, to be safe and grow in your investment journey, you need to plan and do asset diversification. In this manner, even if one of your other investments fail or do not bear adequate returns, others will still be safe.