If you have already paid off all of your debt in credit cards and have in mind financial goals like buying a home, paying college tuition, or retirement savings, then you should do your homework prior to making any investment decisions. You should have the answers to the following questions:
- How much risk for tolerance do you have?
- What kinds of investments are you looking at: mutual funds, bonds, stocks?
- Are you interested in purchasing an annuity or an IRA?
- Do they offer a 401K plan at your job?
You should also keep in mind that there is a degree of risk in every investment. Also, even if you purchase your investment through a credit union or bank that is federally insured it does not mean that your investment is insured by the federal government.
There are several other decisions that you should make prior to investing such as:
- How much money do you expect to make on your investment? Earnings and most investments can go up or down with the market changes. However, bonds generally offer a fixed rate of return. Also, just because an investment has had a great past performance doesn’t indicate that it will have a good future performance.
- How quickly do you realistically expect to get your money back? Whether it's mutual funds shares, bonds, or stocks, there is really no guarantee that the money that you paid in will be returned.
- What earnings are you expecting? Are you going to receive income in the form of rent, dividends, or interests? Some kinds of investments such as real estate and stocks do have the potential for great growth and stable earnings.
- Do you have your investments diversified? There are some investments that are better in certain situations than others. For example, when bond prices go down, interest rates, typically go up. You may also find that while one industry is struggling others may be prospering. By placing your money in several different investment vehicles you can reduce your risk significantly.
- Are there any particular tax advantages to an investment? For example, when you purchase a US Savings Bond it is exempt from local and state taxes. Also, municipal bonds are typically exempt from state taxes as well as federal income taxes. There are also tax-deferred investments that let you postpone and perhaps even eliminate the payment of income taxes.
You should also have your investment goals defined. You should know exactly the reason why you are investing your money. And, by taking all of these factors and questions into consideration, you'll be much more successful in selecting the right investment vehicle to help your dreams become a reality.
This was a guest post provided by James. He runs several personal finance websites including Broker Review that reviews brokers such as Scottrade and OptionsXpress