- Investing can help your money grow and build wealth.
- You need to make sure you're financially ready to invest.
- Invest with a longer time horizon to increase your odds of success.
Investing can help your money grow, but only if you're ready.
If you want to build wealth, investing can be a great way to do it. Once you buy assets with the goal of earning a return on investment, your money can work for you and grow without too much effort on your part.
But before you start investing, you need to make sure you're ready. If you want to make 2022 the year you get started, here are a few key considerations.
Do you have an emergency fund?
Investing inherently comes with risk, even if you are responsible about how you do it. As a result, it's important to have an emergency fund available to you before you decide to invest your money.
An emergency fund should be easily accessible and in an account that doesn't present any risk -- such as a high-yield savings account. Otherwise, you risk not having money to cover unexpected emergency costs if you've used your spare cash to invest and lost some of the money. You also risk having to sell investments at a bad time when a surprise expense pops up.
Your emergency fund should be large enough to cover a few months worth of living expenses, so prioritize putting your money toward this goal before you begin investing for the purposes of earning generous returns.
Do you have money you won't need for a little while?
One of the best ways to reduce investment risk is to be a long-term investor. If you buy assets you are confident will perform well over time, then you don't have to try to time the market and buy when the price hits rock bottom. There's also a good chance your investments will recover from any temporary losses if you're a long-term investor, since downturns in the market are inevitably followed by recoveries.
Unfortunately, if you have a short investing timeline, then you may not be able to wait out a price drop and could be forced to sell assets at a loss. Most experts typically recommend you avoid investing money if you'll need it within the next two to five years for exactly this reason.
Do you understand the different kinds of investment accounts available?
There are different kinds of investment accounts, including taxable brokerage accounts as well as accounts that provide tax breaks, such as traditional or Roth IRAs.
Choosing the wrong kind of account could be a big mistake, as you could either get hit with penalties for not following your account's withdrawal rules or you might miss out on tax breaks. So be sure to research each different brokerage account option before you begin investing in 2022.
Do you have a solid investing strategy?
Finally, you should make sure you have a strategy for deciding what assets to buy in order to build a diversified portfolio likely to perform well over time. You should know how to evaluate whatever you are investing in, whether it's stocks, ETFs, or cryptocurrencies, and should make sure you don't invest in anything you don't understand.
If you have a strategy, an emergency fund, and money to spare that you can invest for several years, then 2022 may be the perfect time to begin investing and building wealth.
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