When to Start Investing? Do These Before Investing

Have you been wondering when to start investing? Here are 5 things that you should consider before investing.

We can make the jump to start investing without taking necessary steps beforehand.

And rightly so, investing is a wealth-building machine that will boost your trajectory towards financial independence.

I’m an advocate that you should be investing your money, here’s a guidance on how to invest.

But investing should be done from the right financial position.

This is about being in the best possible position to start investing in the right way.

When To Start Investing?

I want to advocate that you must ensure you have the right knowledge before you invest. 

Warren Buffett said it best, only invest in what you know and understand.

At the top of your list should be to invest in yourself first!

Take the time to read and learn about investing. The knowledge will equip you to know what to do and what not to do.

Investing in the stock market can be intimidating and scary, however, knowledge empowers you to invest with confidence.

Before you start investing in the stock market, check that you’ve at least thought about these 5 things.

With each of these I’ve broken down why it’s important to think about before you invest.

Let’s get into it.

Perform A Financial Audit

A financial audit is a review of your financial positioning to assess where you are at this present moment.

The aim of an audit is to ensure that you are in a good financial standpoint before you start investing.

How do you perform a financial audit?

Start with a budget!

A budget is when you go through your income and outgoings to analyse what is happening with your money.

The aim is to check that you are not living above your means.

Ensure your income surpasses your living expenses. 

The other benefit is that you can start to repurpose your outgoings to have more money to invest.

For instance, you may decide to cancel a monthly subscription to invest the money instead.

Why perform a financial audit before investing?

Investing is a long term endeavour.

The idea of buying a stock today and making millions by the end of the week is a dream.

Some have done it but certainly not the norm.

The biggest driver of growth in your investment portfolio is compounding interest.

Compounding interest is, in simple terms, interest added on top of interest.

It’s when the interest you earn from your initial investment is added back to your investment to earn more interest.

For this to take full effect you need to be invested for a good amount of time.

Getting in control of your money means you won’t invest money you can’t afford to live without, especially in the short term.

Plus it enables you to free up some money to put towards your investments.

Build Up An Emergency Fund Before Investing

Investing is a long term game so it’s important to build up an emergency fund.

An emergency fund is a pot of money that you have saved to access when an emergency happens.

An emergency can be paying for repairs on your car or house, or covering your living expenses if you’re not working.

How much should I save?

Ideally, your emergency fund should have at least 3 months worth of your living expenses.

When you have a budget you’ll know how much you need to live on every month.

Multiply that amount by 3, and that should be a good aim to have saved as a minimum.

There is no upper limit, the more you have the better position you’re in.

You may choose to save up 6 months, 1 year, or 3 years worth of living expenses.

Remember this amount of money is not towards your investments but separate from it.

Why is it important before I investing?

It has been proven that over the long term the market goes up, meaning the value of your investments will increase too.

Investopedia reports the average return from the S&P 500 index fund is 8% per year, calculated over the last 60 years.

But in 2019 the rate of return was around 30% whereas in 2018 it was -4%.

The market is volatile and if you dip in and out in a short timeframe you may lose some of your money.

If you don’t have any savings and something happens, you may have no other choice but to sell your investments.

There’s no way of predicting when an emergency will happen so you may sell at a loss.

Having an emergency fund allows you to leave your investments untouched to grow and compound over time.

Our Ultimate Money Plan budgeting spreadsheet empowers you to track your savings and ensure you’re building your emergency fund.

Pay Off High-Interest Debts Before Investing

If you have high interest debts you should consider paying them off before investing.

Paying off debts does not sound as exciting as investing but it yields the same results.

Debts take money away from you pocket, alongside robbing you of potential future gains. 

If you had no debts all that money could be going towards building your financial future, and that’s the aim!

Paying off debts will actually work in your favour in the long run, despite it potentially pushing back your investments.

Why should I pay off debts before I start investing?

Your net worth weighs up your assets (what you own) against your liabilities (what you owe). 

Your investments would sit on the assets side and your debts will sit on the liabilities side of the scale.

As I mentioned earlier, the average rate of return for the S&P 500 is around 8% per year. It’s 7% for the FTSE 100.

If you have loans, credit cards or other debts that are more than the 7-8%, you should pay them off.

Lets compare the two, very generalised figures here and in no way do these reflect all scenarios.

Purely for your education but also to drive the point home.

Although you’re making money through your investments, your debts are growing at a faster pace.

Compounding interest is at play in both scenarios! It works FOR you with investments and works AGAINST you with debts.

Paying off these high interest debts will result in your net worth moving up instead of down.

Truth is, you can do both. There is no right or wrong.

The main thing is that you are aware of the consequences of your decisions and can plan accordingly.

Our Ultimate Money Plan budgeting spreadsheet also helps you plan your debt repayments plus calculate and track your net worth.

Have The Right Level of Protection

As mentioned above, before you start investing, have an emergency fund to cover you when life happens.

There are some incidents and emergencies that occur that need deep pockets, and this is where insurance steps in.

Protection is great for covering the deep pocket incidents that could cost more than your emergency fund and investments combined. 

Insurance is one of the most overlooked things when it comes to personal finances in general, never mind before investing.

What cover should I consider and why?

Life insurance should be considered for everyone, especially if you have dependents, a spouse, or owe large amounts of debts.

Life insurance gives your loved ones a pay out when you pass away.

Those around you will have financial burdens to make things work should there not be money left over.

When you pass away your debts form part of your estate. The assets you own will be used to repay these debts before your family get a payout.

Life insurance plugs this gap.

Another one to consider is home insurance.

If you’re a homeowner it would be building and contents, whereas if you’re renting it would be just contents. 

Think of scenarios like water leak damage, thieves steal your furniture, or structural damages to the house.

All these costs are not cheap and will cost substantial amounts without any cover in place.

Other notables are health insurance, income protection, and business insurance if you’re self employed.

Remember, the purpose of insurances is to give you the financial cover should the unexpected happen.

Which would otherwise result in you being back at square one if you have to sell your investments.

Plan Your Life Goals Before Investing

The concepts I’ve spoken of so far are all about preparing yourself and your finances before you begin to invest. 

This step is actually taking the opposite view and looking ahead.

What are your life goals?

Are you planning to have a wedding, buy your first home, pay for your children to go to private school?

Aiming for early retirement, or looking to relocate and move to another country?

Your life goals are your north star to aim for and work towards.

Essentially, your life decisions should match up towards you achieving your life goals.

This will also help you analyse whether you should invest or save money depending on the time horizon you have.

If you want a wedding next year then buy a house shortly afterwards, investing might not be the right method. 

Because of the short time you want to give yourself to achieve those goals, remember the concept of compounding interest.

If your aim is to build wealth and move abroad in 5 years time, then investing should be considered.

Ok, but how do I set life goals?

I would break down life goals into 3 time frames, short term, medium term, and long term.

These could either be:

• 1-6 months, 6-12 months, 1-2 years. Or,
• 1 year, 1-3 years, 3-5 years. Or,
• Whatever works for you

Then break down your life into categories:

• Personal, professional, spiritual, business, health, finances, family etc

Then analyse each category, setting goals over the defined time frames. You don’t need a goal in each category for each time frame. 

For instance, you may have a financial goal to build a new income stream over the next 1-6 months, but you don’t know yet what to aim for in 3 years time. That’s okay.

Sounds cliche I know, but you should really use the SMART format when writing out your goals.

• Specific: I want to improve my credit score
• Measureable: It’s currently showing poor on Experian and want this to be at least very good
• Achievable: I will learn ways to improve my score and stop doing what messes up my score
• Relevant: A high score increases my chances of getting a mortgage in the future
• Time: I want to buy a house by 2022, so I want to have increased my score by the end of 2021

A key tip, set goals that are not dependent on other people’s input to be achieved. Set goals that totally depend on you and you alone.

What does this have to do with investing?

Your life goals drive your actions and decisions. 

The main question is, which investment strategies and methods best fit with my life goals?

There are various ways to invest I’ve only spoken of the stock market, which is one way to invest. 

Different investment strategies require different skills and also yield different forms of return.

Ultimately, don’t invest into something that does not line up with your goals and your why.

Take Action to Start Investing

Investing is a must for building wealth and reaching your long term financial goals and dreams.

So I would encourage you to start investing as soon as possible.

Seek professional advice should you need it.

Which of the above are you going to look into immediately to start your investment journey sooner rather than later?

Let us know how you’re getting along by getting in touch with us, we’d love to hear from you

Knowledge is powerless without action

So take action, and take care

Thando