We
have all heard of the seven deadly sins, things that you should never
do or you risk the harshest of punishments. But many people don’t know
about the seven deadly questions, involving your investments. There are
seven questions that one must answer before dropping a dime on
investments, otherwise their money could be lost in the fiery pits of…
well you know where. Making investment decisions isn’t easy, especially
if you are just entering the game. There are a lot of details that
many people don’t think about until it’s too late. So, if you want to
avoid the eternal pain of poor investment plans, ask yourself these
seven questions.
1. “Why?”
It’s a simple question, but it’s often the hardest one to answer. Why
are you investing, and what do you hope to gain from it? In other
words, you must set specific goals. Maybe you want to save for
retirement, maybe you want to send your kids to college for which we also recommend this career guide, or maybe you
just want some breathing room from everyday expenses. Whatever the
reason, it’s important that you define why you investing your money and
what goals you wish to accomplish in doing so.
2. “What
is my time frame?” When can you expect to earn your money back? This
all depends on what kind of investments you make. Most of the forms of
investments which you can cash out of at any time, such as stocks,
bonds, and mutual funds, often leave you with the risk of not getting
back all that you paid in. Many other investment options will limit or
restrict the opportunities that you have to sell your holdings. Make
sure you are aware of these before you enter the game.
3. “What
am I going to get out of it?” What can you realistically expect to
earn on your investments? Having an unrealistic idea of playing the
stock market and striking it rich could leave you simply striking out.
Most earnings, as millions of people encountered in the past few years,
are dependent upon the market, and can rise or drop based on market
changes. Other investments, such as bonds, have fixed returns that
aren’t as susceptible to market changes.
4. “What
kind of earnings will you make?” Very few times when investing does a
wad of cash appear in your mailbox if you’re successful. Many times
your success is paid to you in things like potential for earnings
growth, as in real estate purchases. Other times it can come through
interest or dividends. Knowing the details of your payback can help you
make better decisions when you are paying in.
5. “What’s
my risk?” And here comes the basic balance in investing, risk versus
reward. The higher the risk, the higher the potential reward. Overall
there is no guarantee that you will get your money back or receive the
earnings promised to you. Unless you have your money in a savings
account or a U.S. Treasury security, both of which are backed by the
federal government, your money is essentially unprotected. Make sure
that the risk you take is worth the reward that you expect to achieve.
6. “Is
my money diversified?” We can all remember our mothers as some point
or another saying, “Now, don’t put all your eggs in one basket.” Well
your mother’s wise words ring true in terms of investments as well.
Certain types of investments do better in certain situations, so by
diversifying your investments, you are spreading your eggs across many
baskets. That way if a certain industry tanks or sector is struggling,
you will have plenty of other baskets holding your money safe and sound.
7. “What
is the effect of taxes on my investments?” It may seem like the
nightmare of early April trying to sort out your taxes each year, but
taxes are just as critical in making investment decisions. What you
contribute into certain investments, such as a Roth IRA, are not tax
deductible, but the real advantage is there is no taxation on the
contributions or earnings provided you reach the required age of 59½
before funds are withdrawn. Other options, such as Traditional IRAs,
work in the opposite way, in that your contributions may be tax
deductible and typically all withdrawals are taxed as income once you
reach the required age of 59½. Certain bonds are exempt from state and
local taxes, such as U.S. Savings Bonds, while others, such as municipal
bonds are exempt from federal income taxes and most state income taxes
as well. Make sure that you are using your investment’s ability to avoid
taxes in the most efficient ways possible.
Now
that you know the questions, it’s up to you to determine the answers.
The important thing to remember is that the best answer to each one is
whatever works best for you and your goals. Take the time to think
through your decisions and all the alternatives. There is no standard
pathway to success on the road of investments, but if you take the time
to ask yourself these seven questions, it will be a much smoother ride.
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