If you want to build wealth over time, you need to invest. What you invest in is up to you -- your goals and your risk tolerance -- but investing is an important part of financial health over time.
Before you start investing, though, you need to make sure you are in a good position to make those investments. The good news is that just about anyone can be in a good enough position to invest.
Getting Started: Low-Cost Investing
Before you start investing, it's a good idea to look at your debt situation. Have you paid off, or mostly paid off, your high interest consumer debt? Investing to receive a 6% annualized return isn't going to do you much good if you are still carrying credit card debt with a 19.99% APR.
Get rid of your high-rate consumer debt, and then consider investing. You don't have to be completely debt-free to start investing. Indeed, low-rate debt, like some student loans, mortgages, and even some car loans, need not be a barrier to investing. As long as you manage the payments easily, and the debt is truly low-rate (below 5%), it's not a bad idea to think about investing.
You don't need a lot of money to get started investing, either. There are a number of online discount brokerages that allow you to start investing with as little as $25. If you have your finances in order and you have paid off your high-rate consumer debt, start investing, even if you don't have much. Index funds and ETFs are low-cost, and you can invest a set amount each month, without the need for stock picking.
Most online brokerages have automatic plans so that money is taken from your checking account and invested in the index fund or ETF of your choice each month. This takes the guesswork out of investing, and it ensures that you invest every month. As your financial situation improves, you can increase the amount you invest monthly, accelerating the rate at which you build wealth.
Preparing for Bigger Investment Opportunities
If you want to expand beyond index funds and ETFs and take advantage of other investment opportunities, you need to reform your finances further.
First of all, you must have a stable financial situation. You need to have a good cash cushion or emergency fund, as well as diverse sources of income. Before you can take bigger risks with your investments, you should have a higher financial risk tolerance.
It's also important to have a store of liquid assets that you can convert quickly to cash in order to take advantage of an opportunity. Whether you plan to buy a fourplex and rent it out for income, or whether you think that the latest IPO is a good opportunity to get in on the ground floor, you need to have the kind of liquidity that allows you take advantage of these chances. Figure out what sorts of opportunities you are looking for and, then make sure you have enough money readily available. This requires active searching because you don't want a pile of cash sitting in a low-rate account for too long; at that point you run the risk of losing out to inflation.
You can also set up certain financial entities, like trusts, that make it easier to transfer your money around when you want to invest in an opportunity. Consult with a knowledgeable professional about the best way to structure your wealth and manage your assets when you have enough to begin taking advantage of the biggest investment opportunities.
Investing can provide you with the tools to succeed at building wealth over the long haul. However, you must plan ahead, and you need to make sure your financial position is such that you are ready to take full advantage.
Miranda Marquit is a freelance financial journalist. Her work has appeared in numerous money- and business-related publications. Miranda's blog is Planting Money Seeds.