7 Questions to Ask Yourself Before You Invest

question Before You InvestBy Tristan Ellis, Staff Writer

The first question people ask is, “What should I invest my money in?”

The answer to that one question depends on how you answer the next seven questions:

• What do I want the money to do for me?

You may need additional income to meet your current expenses. Or are you saving money for retirement, a child’s education, dream vacation, or for a source of emergency funds?

• How liquid does the investment need to be? 

Liquid refers to how fast an investment can be turned into cash without losing any dollars. Consider when you’ll need the money. Investment goals such as retirement do not need to be as liquid as an investment goal of having access to emergency funds.

• What is your tolerance for risk?

Can you afford to lose a portion or even all of your money? Think about the impact of a loss may have on the investment. Generally, the higher the risk, the higher potential return. And the lower the risk, the lower the potential return.

• What is the impact of income taxes?

Sometimes income taxes can have a large, negative impact on your investment results. For example, many people with high income invest in municipal funds because the bonds’ interest is generally exempt from federal, and often state, income tax. Qualified retirement plans, life insurance policies, and annuities are preferred to accumulate money for retirement, because no taxes may be due until the money is withdrawn.

• What is the economic outlook?

As you probably experienced recently, the state of the economy can have an effect on everything including investments. The times when inflation is high, tangible investments such as real estate, precious metals, and collectibles have tended to garner good results. During stable or declining inflation, intangible assets such as stocks and bonds may do well.

• Do you have what it takes to manage the investment?

You may not have the specialized skills, experience, and knowledge you need to select or manage an investment. Consider getting professional investment advice or investments where such advice is available.

• How much money do you have to invest?

What you can or should invest in depends on how much money is available. Direct investments in the stock market may require a large investment, but many mutual funds take smaller monthly investments.