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Interrogate before you invest

Posted September 5, 2012 by Elizabeth Goldman to Investing 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

It's not enough to save money, in a savings account, for your future. You have to have a legitimate plan of action before you invest one red cent. A financial planner might be able to help you map out a comprehensive financial plan, but you might not be able to afford one yet. You can save yourself some money and get started with a few things that the planner would ask you for anyway. For example, goal setting:

What are my goals?

Having clear-cut goals is crucial. Do you want to retire? If so, when? How much money do you want at retirement? Sometimes, your goals will be short-term ones that are as simple as planning for next year's vacation. Other times, you will have to decide whether you want a new car or whether you're willing to buy used. Don't make the mistake of not factoring in major purchases over your lifetime. In other words, think long-term about how you will pay for things like automobiles, whether you want to pay off your home early or keep your mortgage running until you retire, and whether you want to help your kids out with college.

Write down your goals. Another mistake people often make is they fail to write down their goals. It takes just a minute to do, and you can review them any time you wish. However, having vague goals, or goals that aren't written down, will prevent you from taking a long-term view of your finances since anything that isn't written down is non-objective. Once you've written down your goals, hand them to someone you trust. Without any further input from you, can this other person read your notes and tell exactly what you want to accomplish during your lifetime? If not, you need to flesh out your goals more clearly.

How much risk is there?

Every investment carries some kind of risk of loss. Even guaranteed investments carry risks in regards to inflation and real value. Therefore, you should think about what type of risk you're willing to accept and then write it down along with your goals. Some investments, like bank CDs for example, pay a guaranteed rate of return. However, that guaranteed rate may not exceed the rate of inflation. Therefore, you could end up with a negative real rate of return over the long-term. You could invest in stocks or mutual funds, however, there may be a significant risk of loss of your savings if the company or stock market as a whole doesn't perform well.

How fast will I get my return?

Many investors worry about when they will get their return. Getting quick returns is usually best left to investment professionals. However, you also don't want to invest in financial products that never pay off. Some investments pay quarterly, some monthly, and some annually. If you're investing in compounding investments, choose the shortest interest payment period possible. If a bank CD pays every month, and compounds every month, your savings will grow faster than if it compounded annually.

What investment vehicles should I use?

The types of investments you use are driven entirely by your goals. If you need protection and security, insurance products like cash value life insurance and annuities can be a very good way to go. If you're savvy with money, you might opt to put some of your money in a money market while leaving some of your money in mutual funds. If you're very knowledgeable about investments you might even choose exotic investments like stock options or even forex.


Whatever you choose, you should meet with a financial professional at some point. He can walk you though the finer details of your investment strategy, challenge assumptions being made about investment performance, help you refine your goals so that they are realistic, and help you choose investments that are suitable for you. Visit Discover Bank for more information on the most popular types of investments.

About Elizabeth Goldman: Contributed by Alan Wiser. Alan is a freelance writer with a penchant for finance.

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