4 Things To Do Before You Start Investing
A: Hey, you should start investing.
B: Why?
A: It’s
because the stock market is so low right now and you just buy
one stock, you will earn no matter what!
B: Really? But I
don’t know which stock to buy!
A: Just buy the one that you
know. Like Amazon!
B: How do I get started??? *feeling
impatient*
That kind of conversation happened a lot of times in early 2020 when COVID-19 just hit. As much as I agreed that it might be a good time to start, but looking from a newbie perspective, one should not just jump into investing just because a friend of yours successfully persuaded you. You should at least do some homework on how to get started, etc. instead of taking in all your friend’s advice unless he/she is a pro (still got to do your own homework).
Well, at least I did not start in a rush just like person B who was persuaded to start by person A and both are my friends.
There is no doubt that more amateurs are getting on board with investing in assets like stocks and cryptocurrencies, although there are other kinds of assets like fixed Income (bonds), properties, commodities, etc. Especially with the platform that became very popular and recently IPO-ed Robinhood, investing just became easier and simpler.
However, it is very risky if one does not (eventually) learn how to invest properly. This is because that act is basically just like gambling. Based on research, gambling can bring about this thinking or feeling whereby eventually, you just keep on betting and betting until you get back all your losses or you become greedier and bet even more and that’s how you are going to be trapped.
Well anyway, that aside, there are some things to ensure that what you are using your money for is the money that you are willing to lose. At the same time, even though you lose your money, you still can go on with your life, albeit you need to work harder to earn back all your lost money. Which is why learning how to invest eventually is important too as you won’t seem like a fool who just lost a lot of money anyhow.
So, before you start investing, ensure that you have these things in place:
- Emergency fund.
- Enough insurance coverage.
- Pay off (high interest) debts and save.
- Investment pre-work.
With those in mind, let’s dive deeper into each of them to better understand them.
1. Emergency Fund
Having an emergency fund means that you have some extra cash lying around that you can have immediate access to when you need it, especially during an emergency or rainy day. Hence it is called the emergency fund.
You should have this fund available before you start investing. This is to ensure that you will not sell your stock investments unnecessarily or prematurely when you are forced to need some money at that moment. It is a lot better to just leave your stocks to become multi-baggers in the future rather than selling them prematurely or at a loss.
How much should you save for this fund then?
Well, generally, it was suggested to have at least three to six months of your monthly expenses.
Now then, why three to six months?
It was also said to be the average time for one to find a job again after getting laid off.
Now it might also click as to why it is the sum of your monthly expenses. During the period of you not working because of whatever reasons, you need money to settle your basic necessities at least. Hence, it is the calculation of your monthly expenses instead.
However, there are some people who suggested that it is better to get six months of your salaries instead if possible. This means you need to save more, unless your expenses are huge or use up almost all your monthly salary (which can be a bad habit, it depends). Personally, I had aimed to achieve this instead after I realised I was able to save six months of monthly expenses. This also means you would have more buffers for emergency circumstances.
Speaking of the duration, there is no really one hard rule on the exact amount that you should have. There are people who save three months’ worth. There are people who save six months’ worth. I personally had thought of saving one year’s worth instead. Also, if your job is not very stable like being a freelancer, you might want to save more as well. In the end, it really depends on your comfort level.
Last but not least, this point is something that I had struggled with previously. When you think about all the “just in case” scenarios, you might fall into the trap of setting aside too much money.
That is good, isn’t it? Well, the more your money is sitting idle, the more time wasted not making it working for you. All the excessive cash could have been put working for you to get better, higher returns instead. So, it is your choice to set the limit.
2. Enough Insurance Coverage
This second point got me confused initially. What has insurance got to do with investing? It would just drain my money even further, or at least that’s how I was thinking, especially since I am one of those who just dislike all the agents that always come swarming since I was still studying.
However, the older you get the more you become more aware of the importance of insurance. Life is unpredictable. As much as you are going to ensure 100% you take care of yourself, it is always better to have the protection up first.
If you are very rich and self-insured, I think that should be fine. Otherwise, it just makes sense to get insurance coverage for yourself, especially like health insurance.
Insurance gives you the protection against events including hospitalisation and critical illness. When you invest without having enough insurance protection, you will again might be forced to sell your stocks that can make you money otherwise to pay for your hospital bills, etc.
To save and not feel overpay for insurance, you could perhaps consult your trusted financial advisor to ensure you have adequate insurance coverage based on your life phases or circumstances.
3. Pay Off (High-Interest) Debts and Save
The ideal situation is that before focusing and channeling your money into investment, it is best if you can pay off your debts. Then, save as much as you can (perhaps more than 50% savings rate) so that you can build up your emergency fund as early as possible and then channel the rest to investment. Also, by saving up as much as possible, that means you can utilise your money more to generate more money for you. This last one is pretty common sense as no savings means no money which means no bullets for investment.
However, that was probably only an ideal situation. In reality, it takes time to clear debts. If you were to wait to clear a big amount of debts, probably you won’t get started on investing. Also, I had read a US-based story on this couple that was shackled by debts, but managed to still do investment, saved for emergency fund and paying off debts at the same time gradually! Well, this requires discipline at its core. But don’t be discouraged!
You can start by clearing debts with high interest as these will eat you up because of the compounding effect. If they are not cleared, it is harder to save.
Now, you might think that investing in high return stocks would help you pay off the debts. However, don’t forget investing comes with risk. High risk high rewards. That also means when you lose your money, you might lose big and it might cause things to be worse. Unless you have some solid plans, I think it is best to proceed with precautions.
The other way of paying debts is by paying off all the smallest debt amounts first. For me, this kind of makes sense because if you have a list of debts, seeing the debt being cleared off one after another can bring positivity to you mentally and psychologically. So, by clearing the smallest ones first, it really can help to lift up some of the loads off your mind.
If you work hard and be disciplined, debts can be paid off eventually. Also, at the same time, you can set a budget on how much to pay for your loans, and save the rest. This way, you can eventually start investing earlier! To make money from investment, you need money. Hence, the more you can save, the better. However, do not compromise your duty to pay off debts if any. After all, a person without debts would be able to channel more money to investment. Oh, and of course by debts I mean the bad debts like credit card debts and not your mortgages.
4. Investment Pre-work
This part is related to the good-to-know-beforehand kind of thing. It comprises the following pointers:
- Decide which investing you want to start from like growth investing, dividend investing, etc.
- Decide which country you want to start from.
- Choose your broker.
- Decide your investing goal or horizon.
- Keep learning about investment.
- Do your own due diligence.
These are more like getting you in a ready-set position before the go.
Have a thought on what kind of investing you want to go for and then the investing in which country. Usually while deciding on these, you would have a thought on your investing horizon based on whatever goals that you might have. If you are thinking of getting quick bucks from the US stock market, that’s more like trading, like being a trader in a typical popular worldwide US stock market.
Anyway, you would need to decide what platform or which broker you would use to do all your investing activities. Then you are pretty much set. Just keep on learning from any resources like books, forums, etc. and do your own diligence before investing in anything.
Bonus
This is more of like a reminder because there have been cases where people thought they could make a quick big buck in a really short term but it turned out otherwise because of the volatility and uncertainty of stock markets.
Do not invest the money that you will need immediately or in the next five years (short-term). With that said, your emergency fund is a no-no. You should not touch it at all. Also, the money that you need for your wedding or downpayment for a house shouldn’t be used as well, otherwise your significant other will be mad.
However, that does not mean there is no other way out. You can perhaps move that money to a higher interest savings account, or put in other instruments that have much lower risk, and also possibly be able to withdraw when the time comes.
Otherwise, if you are scared, just don’t touch that money and use your excess money that you are willing to lose to invest.
Wrap Up
Everybody knows if investing done right, it will definitely grow your money. It can help your money to beat the inflation rate as well. Also, the return from investment sounds a lot better than the meagre n% interest from banks generally.
However, this article is to help you, guide you, on what to do before the investing phase. Just watch out for the general pointers, and you should be fine. You can also read up more based on certain pointers about whatever that is more specific to where you are from. After all, doing your own diligence to suit your preference is recommended.
So, hopefully you benefit from this article and if you find this useful, feel free to share with your friends or any other people whom you think might be able to benefit from this. Feel free to follow me for more articles in the future!
Thank you for reading.
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