Before making any financial investments, it is important to establish what you are trying to achieve— keep the end in mind! Here are a few steps you can take in order to make smart financial decisions and investments.
1. Build a Cash Reserve: financial experts suggest that you have a reserve of 3-6 months worth of expenses in a bank somewhere to cover you in case of emergencies.
2. Clean up or establish a credit rating: If you have a good credit rating, you are perceived as a low-risk borrower and it is much easier for you to borrow money. Additionally, the lower your risk, the lower the interest rate you will pay vs someone with a poor credit rating. If you have not established credit, apply for a credit card. Maintain a balance on your credit card and pay it in full each month. Pay your bills promptly! Keep each balance under 30% of each limit. You also are eligible for one free credit report each year from Annual Credit Report.
3.Pay Off Debt: Rank your debts according to the interest rate you pay on each. Then focus on paying off the debt with the highest rate first. Just keep up with the minimum payments on your other debt. You are better off consuming your savings account to pay off your debts (but don’t touch your cash reserve).
4. Analyze risk and determine what level of risk is appropriate for you: Risk is the chance that your investments will earn more or less than what you expected. The more volatile an asset’s returns, the more risky it is considered to be. You can mitigate risk by diversifying your portfolio. An easy way to mitigate risk is by buying a stock-owning mutual fund. Financial experts recommend that to maximize returns while simultaneously minimizing risk, young investors should hold 70-80% of their portfolio in the stock market, 15-20% in bonds, and 0-5% in cash. As investors age, their portfolio should become more conservative. Investors nearing retirement are advised to change their asset allocation so that only 60% is invested in stocks, 30-40% in bonds, and 0-10% in cash. Investors are also encouraged to mitigate economic risk by diversifying their portfolio by investing outside of the US. This can be done by including an international and/or emerging market fund in your portfolio. Inflation risk can also be mitigated by adding a small cap fund to your portfolio. Generally, small cap funds provide positive returns after inflation.
5. Monitor Performance: Once you’ve invested in a fund, stock, or bond, you should track its performance. Yahoo Finance and CNN Money are just two places you can go to track performance.