Becoming an investor is a great way to boost your income and secure your financial future, but before you can become successful at investing you need to know where you’re currently standing financially and be sure you’re financially able to invest. This includes knowing what your current net worth is, paying off any high-interest debt you may have, and establishing an emergency fund.
It’s also important to know the difference between income and wealth. Income or your net income is how much money you receive in a certain period of time. Wealth or your net worth is all of your assets less all of your debts.
Calculating Your Net Worth
To calculate your net worth, first take the dollar amount of everything you own and add it up. This can include checking and savings accounts, cash value of a life insurance policy, your house and any other real estate holdings, stocks, bonds, mutual funds, certificates of deposit, government securities, retirement plans, cars, boats, other vehicles, or a business you own.
Now that you’ve added up all of your assets, do the same for any debts you may have. This could include mortgages, credit cards, car loans, personal loans, school loans, home-equity loans, life insurance loans, or any other debts and loans. Now, subtract your debts from your assets and you’re left with you net worth!
Get Rid of Any High-Interest Debt!
Pay off any high interest debt you may have, such as credit cards. This is actually one of the best investments you can make considering credit cards usually carry interest rates between 10 and 30 percent. You’ll be giving yourself a tax-free return of anywhere from 10,12,15,18, and 30 percent or higher.
Establish an Emergency Fund
Financial emergencies show up when we least expect them. Two of the best ways to minimize the impact a financial emergency can have on you is to have the proper type and amount of insurance, and to have cash in an emergency fund.
Emergency funds are used to cover “emergencies” only. Unexpected things come up such as car repairs, loss of a job, repairs to the house, natural disasters, unexpected accidents, divorce, etc.
The size of your emergency fund depends on your income and net worth. If you have a job that is stable and secure, you may only need up to three months’ worth of living expenses. If you’re self-employed or work in an industry that has a history of layoffs, then six months to a year’s worth of living expenses should be considered.
Money for emergency funds should be kept in a safe and liquid accounts, like a bank or credit union savings account.
An emergency fund will help you sleep at night knowing that you’re prepared for unexpected financial emergencies and that they won’t take a toll on your investments.
If you have calculated your net worth, paid off high interest debts, and established an emergency fun, then you’re more prepared than most people to begin investing!