People overcomplicate investing. Mistakenly, they think the ability to build wealth is out of reach. Well, I have seen pastors who used to live paycheck-to-paycheck replace their entire salary with investment income. I have seen people go from being crippled by consumer debt to using debt as leverage in their real estate portfolios. I have seen entrepreneurs from impoverished Ugandan villages scale businesses, bringing economic prosperity to their communities. If they can do it, so can you. There are tried and true principles for how to determine a good investment.
We can examine this truth from a Christian perspective as well. Deuteronomy 8:18 confirms that God gives us the power to get wealth, and Romans 2:11 makes it clear that God is no respecter of persons. What He does for one, He will do for another. However, we must do our part and gain financial knowledge, understanding, and wisdom. Wealth will not drop on our heads like ripe cherries off a tree! We must learn how to be good stewards of the resources God has entrusted to us.
Here’s the thing: nobody ever built wealth by earning and saving. You have to learn how to invest. You also have to learn how to invest in a way that makes you money. This may sound elementary, but you’d be surprised how many people ignore the return on their investment. If you worked a job and your employer forgot to pay you on time, I bet you wouldn’t hesitate to question them about the oversight. You should apply the same intention to your passive income as your earned income. It’s easier to ensure an ROI than you might expect. With that, here are nine brief questions to evaluate before you invest.
How to Determine a Good Investment: 9 Questions
1. How will my money be returned to me?
- Through selling, equity, dividends, etc.
2. When (in what time frame) will my money be returned to me?
- You should at least have somewhat of an idea regarding when you expect to profit from your investment. Is it a long-term play like a Roth IRA, or are you fixing and flipping a house that you expect to give you a chunk of change within the year? Perhaps you’re investing for legacy–money that will benefit your grandchildren that you’ll never touch.
3. Do I have the time to evaluate it?
- To a good investor, no income is truly passive. They understand their investment enough to evaluate it regularly. Though, some investments are more passive than others. An ETF will require less of you than a buy-and-hold real estate strategy, for example.
4. Do I have the time to monitor it?
- See #3.
5. Is there too much risk and not enough reward?
- Every investor has a different risk tolerance. If you work with a financial planner, they will help you align your portfolio according to yours.
6. Is the return tax-advantaged?
- Before you go into an investment, it’s crucial to know how taxes will affect your return. For example, investors contribute after-tax dollars into a ROTH IRA, so they aren’t taxed on the gains. Traditional IRAs are tax-deferred, meaning investors ARE taxed on the gains. Too many people have gone into their golden years without a solid understanding of how taxes have eaten up their retirement plans.
7. Where does it fit on my financial plan/balance sheet?
- In other words, do you have adequate funds to contribute to and care for this investment consistently?
8. Do I understand the investment?
- Never invest in what you don’t understand. Period.
9. Am I making money “going in?”
- You make money when you buy, not when you sell. Investors profit by purchasing an asset below its value. Real estate is an easy way to think about this concept. If you buy a house below its assessed value, you have instant equity–you make money “going in.”
Here are three tips to avoid investment scams:
- Ask yourself the nine questions.
- Put no more than 1/10th of your net assets into one investment.
- Know the difference between a debt investment and an equity investment and what your return will be. A good debt investment is one where you get paid in regular installments at a specific interest rate. An equity investment is one where you own shares or units in a company, and the value of your ownership grows as the company grows.
I hope this blog has helped you understand how to determine a good investment. If you have any questions or ideas, we’d love to hear them in the comments!
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