As students we often hear about the benefits of compound interest (earning interest on interest) and how we need to start investing to take advantage of that interest. We are told that investing will help us reach our financial goals (which it potentially can). Additionally, we may be facing pressure to invest from random people, family, friends, or ourselves. Or sometimes it feels like we are already behind. However, before beginning your investment journey, know the answers to the questions below.
- What is investing?
Investing is the process of giving money or resources with the expectation of a larger amount of money returned to you at a later time. However, this return is rarely, if ever, guaranteed. Before you invest, it is important to understand that you may lose rather than gain money.
- Are you financially ready to invest?
If you have not completed one or more of these items, wait to invest.
- Defined your goals- What are you specifically working toward? What do you want to accomplish and when?
- Budget regularly- Budgeting gives your money a plan and helps you figure out how much you have to invest.
- Established your emergency fund- Before investing you need to have a cushion set for emergencies like unexpected car repairs, medical expenses, job loss, etc. The amount in your cushion depends on you. It can be $500, $1000, 3-6 months of bare bones living expenses or complete expenses, etc.
- Paid off high interest/ credit card debt- Pay off any high interest debt like credit cards or pay-day loans, before investing. Depending on your goals and financial philosophy, this may or may not mean all debt.
- Understand what you are getting into- Have you taken the time to understand what investing means or what you are investing in? If you have not, wait until you have done your research. TikTok does not count, unless it is financial expert Dr. Brad Klontz or someone similar.
- Getting Started to Invest
If you completed the list above, that is great! You may be ready to start investing. You just have a few more steps.
1. Set goals- Will you need the money in a short or long time frame? What are you specifically saving for?
**If you plan to make frequent trades (day trading) on apps like Robinhood or Stash, use fun money and do not count it as savings/ investing. Day trading is speculating rather than investing, which normally is intended to lasting months or years. While day trading can lead to massive gains, it can and more often will lead to (potentially massive) losses.
2. Risk tolerance- What is your risk tolerance? It is important to not be too risky or to not take enough risk. Find where your sweet spot is- the risk level that will not keep you up worrying at night. There are many different risk tolerance quizzes online, try a few if you are not sure of their results.
3. Decide on an investment vehicle (mutual funds, ETFs, etc.) and check its fees (the lower the better).
4. Diversify- After you decide what kind of investment vehicle you plan to use, make sure it is diversified or that there are variety of investments within your holdings to help reduce risk. The phrase warning ‘not to put all your eggs in one basket’ comes to mind.
At Powercat Financial we cannot give specific investment advice, but we can help you find out if you are financial ready to invest. Create an online or phone appointment with us at www.k-state.edu/powercatfinancial, if you want help with your finances or have additional questions about this or other topics.
Also check out our past blog articles about investing (under Money Tip Topics) for more information about investing.
Helpful Links: https://www.investopedia.com/terms/i/investing.asp, https://www.bradklontz.com/about, https://www.investor.gov/introduction-investing/getting-started/assessing-your-risk-tolerance, https://www.investopedia.com/investing/importance-diversification/
Anabelle Sanko
Peer Counselor II
Powercat Financial
www.k-state.edu/powercatfinancial
