Investing is a complicated subject and one where many dangers lurk for the unwary and inexperienced investor. Nevertheless, if you consider the simple rules of our little investment basics, you are well-equipped to avoid the worst investment traps and to invest your money successfully.
Before we get to the basics, let’s answer a common question about windfalls.
Are lottery winnings considered a windfall?
What happens if you find a winning lottery ticket? Is such a big prize considered a windfall? A windfall is a large amount of money won or received unexpectedly. So, yes, lottery prizes are windfalls since they are usually huge and unexpected.
Now that we answered that question let’s learn the main basics of investing a windfall.
5 main basics of investing windfalls
These are the main basics you should always keep in mind when investing large amounts money:
1. Be clear about your goals
It sounds banal that you have to be clear about your own goals before investing. However, an intensive examination of one's own goals is by no means a matter of course. In fact, it is essential for good planning and the right decision.
Take your time and write down what you expect from your investment and your life situation.
The investments must match your individual goals. Therefore, consider where your priorities lie: is it high returns, availability at all times, or absolute security? No investment can achieve these three goals at the same time. For example, you can only expect high returns by sacrificing availability or security.
All these are questions you should ask yourself because they provide information about which investment best suits your personal needs.
In addition, you have to commit to a certain period of time in which you leave your investments untouched.
Are markets reacting a little crazy to certain news? Shut out the noise and learn to deal with losses in a mature way, and give your money time to grow.
Long-term investments are more able to weather the inevitable ups and downs of the market.
2. Start early
The best time to start investing is... 10 or 20 years ago. Did you miss the right moment? No problem, because guess what? The second-best time is: right now.
Investing early can give you an edge even if you're just starting out with a small amount. Why? Because your investments will have enough time to grow and because compound interest plays an important role.
Compound interest means that you make money on the money that your investments have already made. That's why people who start investing earlier do significantly better than those who start investing later.
3. Paying off debt has priority over investing
Before investing, remember one thing: credit and loans are expensive. They generally cost more interest than you can earn with an investment of the same amount. For you, this means that you should always first try to reduce debt before you invest money elsewhere. Paying off credit and loans is often the best investment you can make.
There are exceptions to this rule, for example, when taxes reduce the net interest on the loan, which can be the case with rented properties.
4. Insurance can protect your assets
Certain events can have serious financial implications. The most solid financial investment can vanish into thin air in no time, for example, if you are liable for damage to your own assets. Anyone with a family to provide for may not want to push them into financial difficulties if they die unexpectedly or can no longer work due to illness or an accident.
Thus, those who do not want to jeopardize their standard of living through the occurrence of certain risks can buy appropriate insurance coverage.
5. Can you and do you want to take risks?
The more risk you take, the higher the returns can be. So, taking risks is not something bad per se. However, security has its price, and the returns are then simply lower: with the current inflation figures, it is impossible to compensate for inflation with secure investments. So, the purchasing power of your money is currently shrinking.
Since there are no safe investments that can guarantee inflation compensation, there is only one way out: you have to decide for yourself which risk is still acceptable for your needs. You have to be comfortable with investing. There must be no nasty surprises when the stock markets are choppy again. And you should still be able to sleep well. The number of possible losses should therefore be clear to you in advance, and you should be able to deal with them.
