Chapter 2: Investment Considerations

Long before you invest a penny, it is important to first understand yourself and your current financial picture. You will need to establish your goals, budget, and tolerance for risk.

Goals
Setting financial goals is an exciting part of financial planning. It gives you the opportunity to actively plan for what you want to do with your money. Completing the goals worksheet will help you know what it will take to achieve your dreams.

The most common and important financial objective is building a secure retirement fund, but you may also want to invest for your child’s education or anything else you desire in the future.

The number of years you have to reach your objective is your time horizon. By defining the time you have to save, you can project an estimated rate of return on your investment. If you have many years to save and invest, it is possible to plan for an average rate of return by looking at how the market has performed over a certain time period.

Budget
For investment purposes, budgeting is vital. After all, you will need to know how much money from each paycheck you can set aside on a regular basis.

Complete the detailed budgeting worksheet to learn where your cash is going now, and to plan for changes for the future. At least some of what is left over can be invested. If the amount is too low to reach your objective’s time horizon with the type of investments that you are comfortable with, try adjusting your budget so you can.

Risk Tolerance Assessment
Some people are comfortable taking chances with their investments, while others can’t sleep at the slightest possibility of losing principal. Being aware of your risk tolerance level will help you invest in products that make not just economic sense but emotional sense for you. Answer the following questions either "True" or "False" to learn your comfort level:

1. I dislike making major financial decisions.

2. Overall, safety is more important to me than reward.

3. I monitor my portfolio frequently and adjust my holdings when
   there is any possibility that they may decrease in value.

4. I prefer to keep most of my savings in cash, cash equivalents,
   and bonds.

5. A "hot stock tip" means nothing to me.

6. Investment losses of any kind make me very upset.

7. I need to have penalty-free access to my money at all times.

8. I think people who "play" the stock market are reckless.

9. Gambling is not enjoyable to me.

10. I research my financial decisions carefully, making sure to not
    make "gut" decisions.

The more "True" responses you give, the more conservative an investor you are likely to be.