Getting Ready to Invest: 7 Tips on Starting Off

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Investing in the stock market can be a great way to potentially generate wealth whilst achieving your financial and lifestyle goals. However, before investing is truly on the cards there are a few things that you should consider and achieve prior to getting started. Here’s 7 tips on getting ready to invest in 2021.

Getting Ready to Invest #1: Ensure Your Income is Greater Than Your Expenses

Before you invest, you should have enough income to cover all your expenses with some left over. To determine if you have excess funds or find areas where you can save money, you may wish to sit down and examine your expenses, spending habits and patterns. This will help you determine how much of your income you are spending and what portion you are (or could be) saving. There are a variety of apps available that track your spending and expenses, such as myprosperity.

Once you have determined your necessary expenses (e.g., rent, food, fuel, WI-FI, electricity, insurances) and allocated funds towards personal/social expenses (e.g., eating out, alcohol, dates, shopping) you can start taking progressive steps towards investing.

Getting Ready to Invest #2: Establish a Back-up Fund

Before you start investing, saving for a house deposit, a new car or taking out a loan, we recommend you have an account with enough funds to cover life’s surprises. These costs may arise due to loss of employment, accidents, house damages that need urgent repair, unexpected and unavoidable medical bills, etc. This fund should be one of the first things you save for and establish when you become financially independent.

So, you’re probably wondering how much you need in this back-up fund – unfortunately, the answer is not completely straightforward. Variables such as job stability, employment type (e.g., casual, self-employed, permanent), level of fixed costs (e.g. debt repayments, rent, bills) and children can influence the size of one’s emergency fund. As a general rule of thumb, one may wish to have enough cash to cover at least three months of expenses and living costs. Depending on your personal preferences and circumstances you may want to increase the amount you have put aside (e.g. able to cover up to 6 months)

Getting Ready to Invest #3: Have a Flexible Budget

Whilst you may have money set aside for emergencies and unpredicted costs, it can be beneficial to have some leeway in your budget. This buffer allows for some financial freedom and flexibility. It can help you pay for bills that are higher than originally forecasted, buy a last-minute gift for your Mum’s birthday or pay for a night out when a friend decides to visit. This flexibility in your budget can help you stop feeling as though you are living pay check-to-pay check and reduce some financial stress

Getting Ready to Invest #4: Paydown Your Personal Debts

To ensure maximum benefit and wealth accumulation from your investment, it is beneficial to pay down your personal debts (e.g. car and other personal loans). These debts often incur high-interest rates on depreciating assets – meaning they are costing you lots of money for little to no return/profit in the future. Once these debts are under control, you can contribute the funds to your investment goals and reap the benefits of compound interest.  

Need some help taking control of your debt? Book a free consultation with Vision and we can help you moving forward.

Getting Ready to Invest #5: Prioritise your goals

When considering investing, you should consider other personal and financial goals you might have. Outlining and prioritising these goals will help you indicate if you are ready to start investing, or what you want/need to achieve before you start investing.

Goals you have might include establishing your savings buffer or emergency fund, saving for a holiday, overseas trip, wedding, house renovations, etc. Whilst there is a potential to save for these things and invest at the same time, it is important to understand your wants and priorities.

#6: Understand time horizons

Over a short time frame, it is possible your investment will generate a loss – a situation many of us would rather not be in. Hence it is important that you are investing with money that you cannot foresee yourself needing within the next 5 years, or more depending on your tolerance to risk.

As an example, if you are aiming to buy a property in 3 years, investing these savings in the share market may not be something you want to jump into without considering if the investment is set-up to cater for a shorter time-frame. There is a chance you may be better of using a high-interest saving account, term deposit or bonds.

Having an idea of when you want to access your investment funds is beneficial, as it can help determine where to invest your money and the level of risk you are willing to incur. Vision can guide you through your investment selection by matching your objectives with investment time horizons. This can assist in mitigating risk and maximising your expected return. 

#7: Seek Advice

Rushing into investing can generate a whirlwind of issues. Safe to say, we all want positive returns on our investment without living on the world’s strictest budget. Therefore it is important to be patient and ensure you are ready to invest before taking the leap. Our team of award-winning financial planners have helped hundreds of people in getting on top of their finances and helping them prepare to invest. If you need help, book in for a free consultation below, or give us a call at 02 4014 1999.