How do you decide if you should buy an investment?
Most people don’t give it much thought. They buy the same old things they always have, if and when they have the money to do so. Too often, these individuals don’t have investment criteria. While they may purchase an asset, they often fail to consider the time needed to manage it or how it helps achieve their long term financial goals!
Investing is important. It’s how your money grows and compounds into larger amounts. Over time, it allows your net worth to grow until you achieve financial freedom!
There are 100s of different types of investments, too. They have varying degrees of risk, time commitments, and returns. All of which can be used to determine if one particular asset is right for you.
Personal finance is personal. Everyone has their own unique needs vs wants, money mindset, and plans for the future. This is why you need to create and follow your own set of investment guidelines.
Have you ever bought an item and later had buyer’s remorse? This occurs when you purchase something that doesn’t help fill your need or solve your problem. The same thing happens with investing, too.
Your investment criteria helps you evaluate assets that you’re interested in acquiring. They determine if a particular investment opportunity is suitable and will help you reach your financial goals.
These guidelines assist investors in making informed decisions. They establish minimum standards that shareholders are willing to accept. Once an asset meets this criteria, the investor is comfortable moving forward and purchasing it.
Investment criteria makes the process of evaluating investment options easier and more efficient. They create a systemic and disciplined approach to reviewing opportunities, which removes the emotional aspect from the financial decision-making process.
Your investment guidelines help you determine what is a good return and a smart investment. They also establish the degree of risk that you’re comfortable taking to make your dreams come true!
By using the 5 steps listed below, you’ll be able to create your own investment guidelines. This will act as a well thought out framework that leads you to your goals!
You need to know where you are before you can get to where you want to go. Begin by taking inventory and filling out a personal financial statement. This document shows your current financial health and identifies areas that may need improvement.
Reviewing your current financial situation brings awareness. It allows you to recognize additional steps you may need to take before you invest. These include things like building an emergency fund, paying off debt, and becoming financially stable.
If you don’t know what you want or what you’re looking for, you’ll never find it. This is true when it comes to buying assets, too.
Most people dream of having a happy retirement. They imagine lounging on a beach and spending time with loved ones. But, most don’t create a blueprint that ensures these things happen!
Your goals are the things you want most. They’re your plans for the future and how you envision spending both your time and money.
A budget is a spending plan that supports you in reaching your dreams. It establishes how you’ll use your income to save and pay for expenses. This plan creates a cash surplus which allows you to invest.
Your investment criteria gets based on your timetable and when you’ll need the money back. Cash that you’ll need in the coming months should be kept safe and be accessible. While capital that’s part of your long term plan should take on greater risks.
Consider your future financial needs and your age, too. Determine the amount of risk you’re willing to take and the amount of time you have to recover if there’s a loss.
For example, most people wouldn’t invest in a startup late in life. Their wealth accumulation years are short and this decision could derail their entire financial plan. But, this could make sense for younger investors as long as they understand the risks and it helps them reach their goals.
Also, your investment criteria should include the amount of time you want to spend managing an asset. Passive investments allow you to be somewhat hands-off, while active ones require your participation.
There are hundreds of different types of investments. You can buy vending machines, event tickets, or even rent a cow.
But, these options should only matter if you understand them, they fit your timetable, and they help you reach your goals.
Low-risk assets like HYSAs, CDs, and Treasury Bills are safe and secure. They’re predictable, stable, and generate low returns, which means they also require more capital for you to reach your dreams.
Riskier assets like stocks, bonds, and real estate are more volatile. They can have wild swings, which may wreak havoc on an investor’s financial wellbeing. But, over the long term, they tend to produce greater returns which help you reach your goals faster.
Your investment criteria needs to consider your asset allocation, too. Most people shouldn’t put all of their capital into one type of asset. Instead, you should spread it around to several. This reduces your risk and increases your chances of success!
Risk and return are not the only things for you to consider. Think about the impact your investment capital has, too.
More people are choosing to invest sustainably. They’re adding ESG factors to their investment criteria. This helps to reduce their harmful footprint and supports companies that are working to preserve the world.
Most people struggle to reach their goals because they get sidetracked and distracted. They become frustrated with their lack of progress and lose motivation, which can cause them to give up altogether.
Writing your investment criteria down serves as a reminder and helps you stay accountable to your goals. It prevents you from getting shiny object syndrome and buying something that doesn’t help you.
Reviewing your guidelines and monitoring your progress helps you stay on track. It allows you to see how far you’ve come and how much more there is to go. This also allows you to make changes to your plan so that you can keep progressing towards your goals.
I got laid off from my first job in 2006. During this period, I realized I wanted more control over my time and decided to pursue early financial freedom. After exploring my options, I concluded that real estate would help me reach my goals fastest. I developed a plan and wrote my investment criteria down so that I could refer back to it. This allowed me to buy assets that would lead to my dream lifestyle without getting distracted by the ones that didn’t!
Your investment criteria supports you in getting the things you want. These guidelines set the minimum standards that you are willing to accept.
Too many people invest blindly. They buy the same old assets because it’s what they’ve always done or it’s what their friends do.
Instead, establish your investment criteria. They’ll ensure that you’re buying the best assets for helping you reach your goals!
What’s your investment criteria? Comment below.
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