Never Invest Money You May Need Soon

Another important investment tip is to never invest money that you may need in cash for something outside of investing over the next few years. You need to make sure that you are financially healthy and stable before you even dip your toe into the investing waters.

The number one rule for investing is that you should never risk money that you can’t afford to lose. If you start to build a portfolio with money that you need to survive, you will eventually be forced to sell good investments. These forced sales may happen during a depression, which would mean you’d have to sell at a low price. This will hurt twice as much when the investments recover without you.

To make sure that you are investing with money you can afford to keep invested, you should make sure that you can pay your mortgage and cover your basic livings expenses. For added insurance, maintain a “safety” fund that includes about 3 to 6 months of income. After you have these bases covered, you should have enough money left over to invest without having to worry about forced sales.

The last thing you want to do is buy high, see the market shrink, and then take your money out of the market at its lowest point, right before a prosperous recovery.

Another reason not to invest money that you may need in the coming few years is that you wouldn’t want to miss out on potential benefits. Let’s say you’re holding a really good stock that is steadily increasing in price and appears to be well poised to keep going up. And yet, because you need the cash for something else, you may be forced to sell your shares sooner than planned. And in doing so, you may also be forced to realize taxable capital gains sooner than you expected.