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Rising inflation. Ongoing supply chain issues. International Conflict.
There is a lot of volatility in the market these days, which makes many entrepreneurs and investors feel stressed. With so much uncertainty, choose How allocating money and being confident in those choices can be challenging. Too often people get caught up in analytic paralysis or lose their sleep needlessly by doubting themselves.
One of the best ways to reduce that stress is to take the emotion out of your decision making. And the best way to take emotion out of the equation is to establish clear investment criteria. Knowing exactly what a good investment looks like will help you make wise decisions quickly, efficiently and confidently, no matter what else is happening in the world.
Related: Why the current volatile market is a good time for impact investing in undercapitalized entrepreneurs
Step 1: Understand who you are and what you want
Investing is not a one-size-fits-all process. An excellent opportunity for you may not be great for someone who doesn’t share your interests, risk profile and goals. This means establishing your investment criteria starts with introspection.
Spend time answering the following questions:
- What kind of lifestyle do you want your investments to fund? The answer to this question will help you create accurate financial goals.
- Are there certain types of assets that you enjoy more than others? Some people enjoy buying and managing real estate, while others prefer commodities or currencies. Some people are deeply involved in a single business, while others enjoy the thrill of serial entrepreneurship.
- What do you think of using leverage? The degree to which you are willing to use borrowed capital as a source of funding will affect the types of investments that end up on your preferred list. Strategic use of leverage can dramatically increase your chances of generating returns, but this technique is not for everyone.
Step 2: Use the tax law to your advantage
I always tell my clients: the tax law is a chain of incentives. It’s the government’s way of telling you what it wants you to do, and if you listen, the government is willing to invest with you. So while there are many investments that will raise your taxes as you make more money, there are some excellent options that the government is so excited about that you’re willing to lower or even get rid of your taxes.
How does this work? Governments around the world recognize that their societies are better off when businesses and individuals invest in things like creating jobs, building homes and growing food. So they create tax incentives to promote these investments.
I recently completed an in-depth study of these incentives in the US and 14 other countries and identified seven investment categories that each government supports. The categories are:
- Technology, research and development
- Pension savings
Which of these categories matches the criteria you established in step 1? Spend time learning about what incentives the government offers to investors in the categories that interest you most. When you use these incentives, you enable yourself to build wealth faster by reducing the amount of money you pay in taxes.
Choose the category that best suits you. Then double your research. Ideally, you will be narrowly focused on a specific niche within your chosen category. The more you learn about a specific investment and the more you become focused, the more you increase your expertise. The greater your expertise, the lower your risk.
Related: 7 Best Types of Investments in 2023
Step 3: Create a checklist
Now that you’ve clarified what you’re looking for in an investment and identified the tax-advantaged categories you’ll invest in, you can finalize the specific criteria you’ll use to evaluate each option. Your goal is to create a detailed checklist that will help you quickly and confidently determine which investments are best for you. Once you establish this framework within your investment niche, you can scale your investment process.
Your list should include the future investments:
- Target return
- Expected cash flow
- Make use of requirements
- Exit strategy
- And of course tax consequences
Creating this framework is not a black and white task. Your goals, circumstances and values determine what makes an investment right for you.
You absolutely can and should do this work with the support of your CPA and other financial advisors. They can help you navigate the technical requirements on the tax side and make more accurate financial estimates. Having the right team, in addition to a proven wealth and tax strategy, serves as extra protection against making the wrong choices in stressful situations.
At the end of the day, you’ll have the peace of mind that comes from knowing you’re making investment decisions based on where you are in life, where you want to go and how you want to get there. And when you put your investment strategy together with your tax strategy, you can make more money faster and pay less tax at the same time.