Clean Up Your Finances Before You Invest
Topics: investing, investments, savings accounts, money market accounts, stocks , bonds
Before you consider investing in any type of market, you should really take a long hard look at your current situation. Investing in the future is definitely a good thing, but clearing up bad or potentially bad situations in the present is more important.
The first thing you should do is get a copy of your credit report. You should do this at least once a year. It is important to know what’s in your credit report and clear up any negative items as soon as you possibly can. If you have $25,000 set aside to invest, but you have $25,000 worth of bad credit, your best bet is to clean up your credit before you start any type of investing.
The next thing you should do is look at what you are paying out each month and get rid of any unnecessary expenses. Although things like high interest credit cards are convenient and nice to have, they most certainly aren’t necessary and can end up costing you thousands in the long run. Pay them off and get rid of them. Likewise, if you have high interest loans outstanding, you should pay them off as well.
If nothing else, you could do a balance transfer from one credit card to another, exchanging the high interest credit card for one with lower interest. You could also look into refinancing high interest loans with lower interest loans. You might end up having to use some of your investment funds to take care of these matters, but in the long run, you will see that this is the wisest course of action.
If you’re living from paycheck to paycheck like alot of people, it doesn’t necessarily make sense to start investing funds right away. If you’re struggling to pay your bills and your bank balance is always next to nothing, investing any money you have saved up will most likely put you in a worse financial situation. Your investment dollars would be better spent to rectify adverse financial issues that affect you on a daily basis.
Even if you are unable to invest money at the start, While you are in the process of clearing up your present financial situation you should make it a point to educate yourself about the various types of investments. Read up on things like savings accounts, CDs, money market accounts, stocks, bonds, mutual funds and annuities and choose the type of investments that best suit your needs.
Savings accounts are considered to be a safe haven for your money as your deposits are usually insured, but on the downside they usually offer low interest rates so it takes longer to get a good return on your investment.
A certificate of deposit or CD is an account that usually offers a higher rate of interest than a regular savings account. CDs are also insured up to $100,000 and the longer the period of investment the higher the interest rate. On the downside, there are usually penalties for early withdrawal.
A money market account generally earns a higher interest than a regular savings account. They are also insured and work like a checking account. However, there is a limit on the number of withdrawals or transfers you can make during a given period of time.
Investing in stocks gives you ownership of part of that company’s assets. When the company makes money, its stockholders usually receive dividends and have the opportunity to sell their stocks for a profit. On the other hand, if the company does poorly, the stock price will probably fall and you could lose some or all of the money you invested.
A bond is a certificate of debt issued by the government or a company with a promise to pay a specified sum of money at a future date. Bonds carry a fixed interest rate. The term of a bond can range from a few months to 30 years. Bonds can be traded and are considered to be safer than stocks because bondholders are paid before stockholders if a company goes bankrupt.
Mutual funds are professionally managed pools of money from a group of investors. A mutual fund manager invests your funds in securities like stocks and bonds, money market instruments or a combination of all of them depending on the fund’s investment objectives. Investing in mutual funds allows you to diversify, which makes the investment less risky. Keep in mind that mutual funds usually charge a fee for the service and you will have to pay taxes on any profits you earn.
Annuities are contracts sold by insurance companies to provide payments at specified intervals, usually after retirement. You will be charged a penalty for withdrawing funds prior to a certain age, but you won’t be taxed until you withdraw the funds. Annuities are considered to be safe,low-yielding investments. Additionally, annuities have death benefits that equal either the current value of the annuity or the amount that has been paid into it - whichever is has a higher value.
Once you are ready to start investing, you need a plan. Start by making a list of your most important financial goals like buying a home, paying for a child’s college education or living comfortably in retirement. When you have the extra money, make a habit of paying yourself first by putting money into your savings and investments.
If you feel you don’t know enough about investing on your own, you can always seek professional investment advice. Investment professionals provide a variety of services at different prices. Some are very expensive and others are very affordable; it pays to shop around.
Denise Villani is an author and the webmaster of several websites and article directories. Find more articles and information on investing by visiting www.basicinvestingstuff.info.
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