Your money is a valuable resource, and you shouldn’t hand it over to just any opportunity that comes your way.
Most of us know this and are careful to choose investments that seem trustworthy and fit within our level of risk tolerance. But we don’t always pause to make sure the investment actually aligns with our goals and expectations.
Remember, just because an investment has worked for someone else does not mean that it’s the right investment for your specific circumstances.
To help you go beyond practicing due diligence and start thinking critically about how different opportunities can fit within a broader investment strategy, here are 3 key questions to ask before you make a new investment.
1. Does this Investment Get Me Closer to My Goals?
No matter how strong an investment opportunity might seem — or how well it has worked out for someone you know — it’s only worthwhile if it helps you get closer to your goals. Before you investigate an investment’s returns, tax benefits, and time horizon, the first step is to identify the destination you’re hoping to reach.
Most times, there are multiple ways to achieve your end goal. So rather than looking for a perfect investment — or the one that promises the highest returns for the lowest risk — focus on choosing the right vehicle at the right time to help you reach your destination.
And if you’re not sure where you’re trying to go, think about it this way. As an investor, you can either let your destination be determined by the investment decisions you make, or you can identify your dream destination and then work backwards from there to select investment opportunities that help you reach it. The choice is yours to make, but if you never make a decision at all, you won’t be able to control your destination.
2. How Will This Investment Affect My Taxes?
If you’re an Accredited Investor, you’re most likely going to fall in one of the top 3 federal income tax brackets, paying somewhere between 32-37% in 2022. If you want to start building wealth faster and more efficiently, you need to think carefully about how your investments will impact your taxes.
Not all investments are taxed the same, and many people will advertise alternative investments like real estate as a way to decrease your taxes. But in most cases, this just means that the returns you generate from that investment will be taxed at a lower rate than that 32%+ income tax. For the vast majority of investors, these opportunities will not lower the income tax you pay on your earned, W-2 income.
To help identify the difference when learning about an opportunity, try asking the question, “Will this investment decrease my overall taxes, or will it decrease my income taxes?” In most cases, the answer will be that while the investment comes with certain deductions you can claim, those deductions will not directly impact the amount of income tax you pay.
This is not to say that real assets like real estate are not worthwhile investments. But it’s important to understand the specific benefits before you decide whether or not to invest. If you’re interested in learning more about the only investment vehicle that simultaneously generates returns and allows you to deduct 100% of your investment in the first year against your earned income, check out our free guide:
3. What is My Ideal Time Horizon and Level of Liquidity?
Here’s a secret that few people realize when they’re first getting started as an investor: the type of asset you invest in matters much less than the benefits it can provide you. Rather than focusing on the “what” — whether that’s real estate, energy equipment, ATMs, or storage units — focus on the “how” and the “why.”
In particular, make sure you know how long you’re willing and able to leave your money tied up in this particular investment opportunity, and how long you’re willing to wait before you start seeing returns.
This will tie directly into your investment goals and will likely change at different stages of your life. For example, if you’re planning to buy a new house or pay for your children’s college tuition within the next five years, you likely won’t want to invest in an opportunity that involves a long-term commitment. If, on the other hand, you’re investing to build retirement savings, a 10 or even 20-year time horizon might fit your needs perfectly.
It’s never too late, or too early to start getting strategic about your investments. If you’re interested in finding a partner who can help you understand your goals and build out an investment strategy accordingly, our team at First Generation Capital Partners would love to meet with you. Simply fill out this form to get in touch.