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A 5-Point Checklist for How to Invest Money Wisely

Tempted to roll the dice with a windfall to make a quick profit? Use this five-point checklist to know if your financial foundation is strong enough to make a risky investment and why investing for the long-term is the best strategy.

By
Laura Adams, MBA ,
June 20, 2018
Episode #549

A reader named Marquis B. asks, “If I had $10,000 that I was willing to risk on buying one stock (such as Netflix, which has been going up lately) and then quickly selling it to make money, would that be absolutely stupid or just risky?”

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Thanks for your question, Marquis. Investing money always involves some amount of risk, which means you could lose some or all of it. And stock-picking is extremely risky compared to investing in a diversified portfolio of funds, which could be made of up hundreds or thousands of individual stocks.

Before you’re tempted to roll the dice with a windfall or any amount of extra money for a quick profit, consider how it could be used to improve your current and future financial security instead. In this post, I’ll cover a five-point checklist to know if your financial foundation is strong enough to make a risky investment and why investing for the long-term is the best strategy.

Checklist for How to Invest Money Wisely

  1. Build an emergency fund. 
  2. Fill your insurance gaps. 
  3. Pay down dangerous debts. 
  4. Contribute consistently to a retirement account. 
  5. Fund your dreams.

You’ve probably heard about a day-trader or a lucky friend who bought a stock that was on a meteoric rise and then sold it to make a lot of money. Yes, it can happen. But the problem with short-term investing is that a stock that looks so promising can reverse direction in an instant, leaving you with a huge loss.

If professional money managers—who study company financials, stock movements, industry changes, and economic trends—can’t predict whether a stock will go up or down, don’t think you can “beat” the market with any certainty.

Betting on a stock’s price is no different than spinning the roulette wheel at a casino. Yes, it can be fun if it’s budgeted as entertainment and you can afford to lose.

But there’s a big difference between gambling and using a long-term investing strategy to build wealth. If you need money for everyday living expenses now or in retirement, I wouldn’t plunk it down at a casino or on an individual stock.

Review this five-point checklist to know if your financial foundation is strong enough to make a risky investment and how to create a more sustainable, long-term plan to build wealth.

1. Do you have an emergency fund?

Your number one financial priority before doing anything else, such as investing or paying down debt, should be to accumulate an emergency fund. Having a cash cushion to fall back on can be the difference between surviving a financial emergency—such as losing your job or having an unexpected medical bill—or getting buried under it.

According to a recent Unum study, nearly half (49%) of adults had less than $1,000 in savings. I don’t want you to be a part of that statistic.

Devastating events are tough enough to handle without also being stressed about money. When you don’t have a financial cushion to soften the blow of a large expense or a loss of income, you could end up going into debt.

Having at least a couple months’ worth of living expenses, and ideally a minimum of six, on hand gives you a tremendous amount of peace. You’ll know that you’ve got money to deal with just about any distressing situation that blows into your life.

Being financially responsible means that you’re prepared for a day when bad luck may strike.

If you don’t have a healthy emergency fund sitting safely in a bank savings account, use every bit of your extra money to build one. Don’t worry if your cash reserves earn little or no interest in the bank. They’re not supposed to.

While it might be tempting to invest your cash cushion, stick to a low-risk, FDIC-insured bank savings so you keep it safe from market volatility. The purpose of emergency savings is to be accessible and liquid in the short term. If you invested it, the value could shrink to nothing the moment you desperately need it. 

Being financially responsible means that you’re prepared for a day when bad luck may strike. Think of an emergency fund as an investment in yourself that insures future financial safety and happiness.

Important Tip: If you’re struggling to build a cash reserve, automate the process by having a portion of your paycheck direct deposited into a savings account or transferring funds from your checking to savings.

See also: 5 Tips to Build a Financial Safety Net

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