Getting Ready to Invest

Before undertaking any investment program, it is critical that you assess your current situation and form goals. Getting Ready to Invest will help you get started.

Though people invest for different reasons, at different times in their lives, they generally have the same objective: achieving and retaining financial security for their families. Whether you are purchasing a home, saving for your children's education, or funding your retirement, you need to develop a solid investment foundation, that is, an accumulation of funds. In many cities, home prices are well into six figures. Today, a college education can easily cost $100,000. Even a car is a major purchase that you must consider carefully. A good investment strategy can help finance your needs--today and tomorrow.

Before undertaking any investment program, it is critical that you assess your current financial picture. Once you've taken an accurate measurement of your finances, you're ready to determine how much you can invest reasonably.

Assessing Net Worth

An integral step in evaluating your finances is assessing your net worth. To determine your net worth, you need to figure out what you own and what you owe. Determining the total amount of your assets and liabilities will enable you to calculate how much you have (or don't have) to invest.

The first step in this process is to determine the total amount of your assets. Assets are your possessions that have value such as money in bank accounts, stocks and bonds, real estate, etc. Once you've calculated your assets, determine the total amount of your liabilities. Liabilities are financial obligations, or debts. These include credit card balances, personal or auto loans, and mortgages, etc.

Once you've calculated the total amount of your assets and liabilities, subtract the total amount of liabilities from the total amount of assets. Ideally, you'll want to have a greater amount in assets than liabilities. If your assets are more than your liabilities, you have a "positive" net worth. If your liabilities are greater than your assets, you have a "negative" net worth. If you have a negative net worth, it's probably not the right time to start investing. You should re-evaluate your finances and determine how you can decrease liabilities. If you have a positive net worth and cash flow, you're probably ready to start an investment plan.

Calculating Cash Flow

The next step in evaluating your present financial status is to look at your monthly cash flow. Begin by looking at your monthly net income--the money you take home every month after taxes. Monthly income includes your salary and other steady and reliable sources of income, such as income from a second job or business venture, interest from your bank account, child support or alimony that you receive, or social security. If you already own some stock, you may be receiving dividend payments; factor that amount into income, too.

Then calculate your average monthly living expenses. These include legal obligations and monthly expenses. Obligations are payments that you are legally or contractually obligated to make, such as your rent or mortgage payment, car lease or loan payment, personal loan or credit card payments. Factor in child support or alimony payments. Legal obligations are generally paid in fixed amounts over a long period of time.

Expenses are those things that you must purchase or pay for regularly. They're not as binding as legal obligations and can vary in amount, but generally they are necessary expenses--for example, money for groceries, utilities, child care, and insurance. Transportation is an expense that virtually everyone has and it takes on many different forms--public transportation, car maintenance and registration, gasoline and parking. Average your actual expenses over a three month period to come up with a reliable monthly estimate for your total expenses.

The balance of your monthly expenditures covers the range of products and services you choose to spend money on each month. Generally, these are discretionary items, not necessities; but to get a true picture of your cash flow, they need to be identified as expenses. They include, for example: cable television subscriptions; housekeeping, gardening, or any other monthly services fees; your average phone bill, including long distance, cell phone, pager, and Internet service provider; club, gym, or organization dues; classes or lessons for anyone in the family, as well as tuition costs; costs for the dry cleaner, hair salon, nail salon, or pet care. Other things to consider (that might not come up at regular intervals) are the amounts you spend on clothing, gifts, and the like. You should include these and any other expenses that come to mind for an accurate estimate of your total monthly discretionary expenditures.