The Two Questions You Need to Answer Before You Decide to Invest

A lot of my friends have approached me lately about investing - I guess word got out that I'm obsessed with personal finance. They want to know what to buy, which firm to use, what accounts to open. You get the idea. You might be wondering the same things.

Before I get tactical with them, though, I always point out that this is a MAJOR ACCOMPLISHMENT! Deciding to invest extra money means two things: first, it means they have extra money, derived from spending less than they earn. And second, it means they're thinking about the long term. These are the building blocks of wealth; people who think this way tend to become wealthy. So props for having some extra cash.

So now they're smiling, they're feeling good. They want to jump right into which broker they should use or which stocks they should buy. <smh> At this point, I have to stop the whole conversation again, and ask two simple questions:

1) Are you sure you should invest?
2) What are you investing for?

The answers to these two questions will have a much, much bigger impact on their investing success than any brokerage choice or stock tips I could share (which I actually can't, because someone starting out should never buy individual stocks). Anyway, let's dig into those two questions:

1) Are you sure you should invest? This one's huge. So you've saved up ten grand and are ready to put it to work. But are you sure you should invest it? I mean, have you already reviewed your Personal Balance Sheet? If you've paid off your credit cards, stashed away some cash for an emergency, and don't anticipate any big expenses for a few years, ok - maybe you should invest.

2) What are you investing for? Investing for retirement, a child's college tuition, or a down payment on a house each has a different time horizon. The last thing you want to do is pull money out of an investment account a year into a big market downturn. Once you know your time horizon, you can figure out which accounts to use, how much to allocate toward stocks or bonds, and even which broker to choose. Seems like a simple question, but it'll get you thinking.

So imagine we're friends. You might be a little peeved I didn't recommend buying AMZN, but you'll be glad I asked these questions. Take a day or two to think them over - review your Personal Balance Sheet and write down your long term goals. Then let's talk shop about when, how, and where to put that extra money.