There’s certainly truth to the old adage that you have to spend money to make money, but it’s also possible to invest too much too quickly, with negative consequences.
Let’s take a closer look at the warning signs that you’re over-investing.
When you’re Running out of Savings
Most experts agree that before you start speculating and adding risk to your portfolio, you should have a strong foundation of traditional savings (money in savings accounts, an emergency fund, a retirement plan etc).
If you find yourself regularly digging into your savings to fund investments, or worse, your savings are drying up, you’re probably overdoing it or trying to ‘run before you can walk.’
Your financial behavior should follow a natural progression and not overshadow each other:
Cover day to day living costs > emergency fund > savings and retirement > property and other investments.
When you’re Living Pay Check to Pay Check
While the idea of investing is to put money in now for a reward later, this shouldn’t significantly impact your day-to-day life. If you’re struggling to make ends meet and are living pay check to pay check, that’s a sign that you may have a liquidity problem and should scale back your investments.
Of course, there’s nothing wrong with being determined and sacrificing luxuries when you’re young in order to benefit later in life, but there are also those that regret not having more fun when they were younger.
Likewise, if you have so little available cash that you wouldn’t be able to cover an emergency, you’re playing things far too tight.
(If you are currently struggling, there are websites that can help you quickly find $1,000 loans online to bridge the gap until you’re liquid again).
If You Aren’t Diversified
Just as you can over-invest in general, you can also over-invest in one area. One of the key principles of investing is diversification—i.e. having a varied portfolio containing different types of investment.
This reduces risk because, for example, if your shares in one company plummet, you still have shares in other companies and investments that aren’t even in the stock market (Bonds, Real Estate, Currencies).
While you may feel more competent in one area, that’s simply because you’ve haven’t put the time in to learn more. In the long-run, you’re holding yourself back from a more profitable and stable portfolio.
When You’re Relying on the Outcome
If you’re making investments where you’re over-reliant on the outcome, then you’re entering the mindset of a gambler and it can never end well. You should never be thinking “well, if I just put this money here and this business takes off, then I can pay off this creditor and all will be ok.”
Investing always carries some risk (even banks can go bust with your checking account), so you should only part with money that you can afford to lose if the worst-case scenario plays out.
If You Have a String of Failed Businesses
A lot of people have dreams of running their own business or being involved with the next Microsoft or Facebook and then cashing out, but in reality, very few people actually do either successfully. If you’re prone to hopping on the ‘next best big thing,’ but none of those things have ever taken off, you need to re-evaluate your mindset.
Are you doing enough research? Are you more interested in getting rich quick instead of putting in the hard work?
If You Have No Idea What You’re Doing
Be honest, do you really understand the basics of personal finance and investing or did your friend just tell you that x company’s value is about to skyrocket and you should get on board? If you don’t really understand where your money is going, then there’s a strong chance you’re going to lose it!
Fortunately, in 2018 there’s no excuse for lack of knowledge as the internet is open to everyone. To get a grounding in the basics, start reading websites like The Balance and Investopedia, hot the good old-fashioned library, or take a few evening classes at the local college.
Investing is one of the key ways to earn money in the modern world, but it’s easy to overdo it. By looking at for the above warning signs, your finances should remain stable. If you have any tips yourself, let everyone know in the comments below!