In this time and era, saving your money by placing them in fixed deposits is no longer the best way to grow your wealth. I say this because the interest you earn by putting your money in the bank will never catch up with the rising inflation rate. Hence, the only way to stay ahead of the wealth game is to invest your money. In fact, investing is one of those things every twentysomething should be doing. Financially literate individuals constantly advocate the need to invest now rather than later. However, are there certain situations when investing is not the wisest financial move you can make? The answer is yes.
Moving towards your financial aspirations can, at times, feel like you are driving in reverse. It is worth pointing out that everyone’s financial goals are different due to many reasons. Self-awareness plays a role in determining the likelihood of you accomplishing your financial goals. That said, sometimes you must figure out when the move you want to make is not the smartest choice for you now.
Here are six times when you should not be investing:
1. You are being bogged down by high-interest debt.
Financially illiterate individuals have difficulty managing their financial priorities. You would be surprised to find out that only a tiny percentage of the Malaysian population managed to keep themselves away from the shackles of credit card debts. These debts often carry with them high-interest rates that can give you the impression that you are not making any financial headway on your repayment.
Perhaps you are seeking a way out of this financial mess. You have heard about the importance of establishing an emergency fund, investing your money and saving for retirement and beyond. However, if you are carrying consumer debt on your shoulders, most likely, your budget is on the verge of collapsing, which begs the question: how do you make the right choice?
Suppose you have loans with an interest rate well over 7%, prioritise those and your savings. Yes, the importance of investing now cannot be overstated. However, 7% is the average long-term market growth rate. If your debt is accumulating interest over that threshold, your financial position will only worsen over time. The best course of action would be to settle the debt as swiftly as possible, figuring out how big your emergency fund should be, and only then start investing.
2. You have unjustified negative items or errors on your credit report and/or low credit score.
Can your investments be in any way influenced by your credit score? No. That being said, errors and unjustified negative items on your credit report can affect your efforts to be financially stable in the future. This is a piece of the financial puzzle you need to solve before you take your financial aspirations to the next level.
These things can occur when to the most financially literate people among us. It can be unintentional, like a small unpaid car loan that finally accumulated enough interest to put a dent on your credit score. The lesson here is that you should make an effort to periodically check your finances to make sure that they are in line with your financial expectations and goals.
3. You seek a high rate of returns in a short amount of time.
If you think investing is a get-rich-quick scheme, you have a poor money mindset. Investing is meant for you to grow your wealth over time, measured in years. It is not meant to be a casino where you make a massive profit with a handful of transactions. Therefore, before you participate in the investment game, you must get your mindset sorted out first.
4. You believe that buying a house is an act of investment.
This is perhaps the most talked-about subject in the world of personal finance. While a property may look like an attractive investment opportunity to capitalise on, the house you purchase for yourself to live in cannot promise you a steady flow of income. In most cases, you are better off investing the money you have initially allocated for a specific property if your final objective is to see your wealth grow.
That said, owning rental properties and leasing them to tenants can be a means to make some passive income in the right circumstances. However, there are still plenty of matters to think about here, such as property taxes and your mortgage, let alone the maintenance fees and insurance costs.
Undoubtedly, you must have a place to call home, and if your dream is to own a house, then, by all means, go ahead. However, it is imperative to understand that a house is not an investment vehicle. Speaking of investment vehicle, neither is a car.
5. You do not have a plan for your credit score objectives.
If you do not have a well-thought-out plan and a crystal-clear vision of your long-term financial goals, you can stop thinking about investing. Your plan and long-term financial objectives are critical elements of investing–they help establish your risk tolerance and timeframe.
If you are struggling to get things rolling, a good starting point would be your credit score. Your credit score has a significant influence on your financial progress in life. To start formulating your plan, you should determine how robust your credit score is. So hit the ground running by obtaining your credit score to find out where you are starting from.
Afterwards, you will have a clearer picture of what you want to work on. Instead of taking your credit score for granted, make it a mission to speak with someone who knows a thing or two about credit repair.
6. Error 404: Savings not found.
Keeping cash in the bank for unexpected situations is essential before you begin your investment journey. If you dump all of your money into various investment instruments, only to find next month you need to make urgent house repairs, you are more probably going to put a dent on your credit score, which will then put your entire financial portfolio in jeopardy.
If the Covid-19 pandemic has taught us one thing, it is that you can lose your job swiftly, and you can fall sick easily. These financial obstacles can potentially end your long-term life plans. If you have to rely on credit to overcome the lows of your life, your debt-to-credit ratio will climb. Not only that, but you are also more likely to settle your debts late. These financial decisions can lower your credit score.
Final 2¢: Do your homework
Do not jump into the world of investing blindfolded. You should have a good grip of the language of investing, which includes understanding what each investment term means. Additionally, you should establish how your asset allocation will work towards your long-term goals.
Understanding what your next move should be can be challenging, especially when money is at stake. No one can predict what is going to unfold tomorrow, let alone three months from now. With that in mind, you have plenty of options on your hands to equip yourself.
If you face any or a combination of these situations, always remember that all is not lost. By equipping yourself with the proper financial education and improving your financial literacy, your financial goals are within your reach. Therefore, I shall end this article with this saying: Hope for the best but expect the worst, and you will be okay.