- What Are The 4 Main Asset Classes?
- How to use investing to achieve your financial goals
- how to conquer your fear of the stock market
- 7 things you need to do before you start investing
Here are 7 things you need to do before you start investing. This list is also applicable if you are already investing, so check it out to ensure you have them covered. Doing these 7 things before you start investing gives you an additional sense of security. It also ensures that you have the right approach and mindset to managing and growing your investments.
Table of Contents
Become debt-free
One of the steps to financial freedom is living a debt-free life. Becoming debt-free is one of the 7 things you need to do before you start investing. Issuing loans is one of the main businesses of banks. Taking on debt other than your mortgage means you are working to make the banks richer. So set a goal to become debt-free, then concentrate on making your money work for you by growing your wealth through investments. Mortgage debt is an exception because the ratio of house prices to income is so high, paying cash is near impossible for most. Also, the cost of mortgage rent (aka mortgage interest) is usually lower than the cost of renting from a landlord.
Emergency Fund
An emergency fund is definitely one of the 7 things you need to do before you start investing. One of the ways to minimise investment risk is by setting a long term horizon for your investments. This means that you should ordinarily aim to have your investments tucked away without accessing them for at least 5 years. If you need funds urgently, liquidating your investments when the market is in decline means you could make a loss. An emergency fund is a fund created by setting aside a minimum of 3-6 months’ worth of living expenditure. Keeping an emergency fund in an easily accessible bank account ensures that you are financially stable and have funds to cover emergencies. For example, if you lose your job, you will not have to sell off your investments prematurely.
Get Life Insurance
A life insurance policy serves as an emergency fund for your loved ones in the event that you die. I subscribe to Dave Ramsey’s view of taking out a term life insurance policy instead of whole life. However, the amount and term of life insurance cover you need depend on your personal circumstance. For instance, you can buy insurance to cover the value of an outstanding mortgage loan. Having a life insurance policy in place means that should anything happens to you, your family will have housing and living expenses covered.
When buying life insurance, take into consideration any cover you already hold. For instance, some employers offer this as a benefit or through a workplace pension plan. Find out the payout from any existing insurance cover to work out if you need to get additional cover.
Write a will
When you die without a will, the law decides how your asset is distributed. A will is a statement of your wishes after you die. Given that you are planning to/accumulating assets by investing, it is important to state what you wish to happen to them in case you die. This is even more pertinent if you have dependants but still relevant regardless of your marital status, age, or gender. Death is such an uncomfortable subject but it is inevitable. Staying debt-free, life insurance, and having a will in place are great defense mechanisms to secure the wealth you are building for your loved ones and generations to come.
Budgeting
Practicing budgeting is essential to successful investing. Budgeting helps you manage your spending so you have money left to invest. A budget is a resource allocation model that helps you allocate your resources in line with your financial plan. I used the words “practicing budgeting” earlier because it’s a habit. To establish a budgeting habit and get tips on how to follow your budget, download our personal guide to budgeting ebook here.
Decide on your investment goal
What is your “why” for investing? Setting a clear goal for investing is important for adopting the right investment approach. There are several reasons for investing. This can range from growing wealth through compound investing, building a retirement fund, investing for your children’s college costs, Investing towards achieving financial independence retire early (FIRE), the list is endless. Your investment goal will determine your risk level, investment horizon, whether to invest actively or passively and so on. If you already have investments in different assets and different platforms, it will be ideal to consolidate the information and evaluate if they meet your investment goal and whether you need to make changes.
Get the right knowledge
Speculating is different from investing. According to Benjamin Graham in his book The Intelligent Investor, “An investment operation is one which upon thorough analysis promises safety of capital and an adequate return. Operations not meeting these requirements are speculative”. For example, if you bought shares because someone said they made x% of return from it, without doing your analysis, you are a speculator. Of course, you can pay a portfolio manager to do the work for you. Also, Robo investing and copy trading is getting increasingly popular. It is still important that you have some knowledge to understand the investments being made on your behalf. Unless you have a large capital, it is often hard to justify the need for a portfolio manager as the fees and costs will erode whatever gains you make. Invest in investing education so that you can make decisions like an intelligent investor.
Do you agree with these 7 points especially 3 and 4? If you are already an avid investor which of the points resonates with you? what will you add? Let me know in the comments below. Have a valuable week!