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In this article we’ll look at 5 things you must do before investing your hard earned cash. These are important steps to take to ensure all you’re fully prepared for the road ahead.
1. Budget, Budget, Budget
Before you start investing give your finances a thorough once over, create a budget and make sure you’re well aware of what funds you have at your disposal. This is an essential tool for those looking to invest. Financial self-awareness is at the heart of mastering your money. We’ve put together a complete beginner’s guide to budgeting as well as a free downloadable budgeting template to get you started.
2. Eliminate expensive debts.
If you have enough spare cash to start investing, then it is sensible to look at paying down your debts first. The main reason is that interest rates for borrowing are likely to be much higher than the rate of return on your potential investments.
You should aim to get the maximum benefit from every pound you spend. By systematically eliminating your debt, prioritizing debts whose rate is highest, you’ll save yourself much more money than you might gain from investing.
3. Prepare for the unexpected.
No matter how much you plan things it’s impossible to account for everything. Out of the blue you might need to find some money to fix a car or replace your boiler. The list of things that can catch you out is endless but if you have an emergency fund in place it doesn’t have to be the end of the world.
Poor health or loss of your main income can also take many by surprise, you just don’t know whats around the next corner. I suggest that as a minimum you should have enough put away to cover your outgoings for three months before you start investing. As I mentioned earlier, a detailed budget will tell you exactly how much you should need to cover all the bases.
The other option would be to invest and get your money working for you straight away and keep a credit card available to use for emergencies. This ensures that every single penny you have is working for you rather than being squirrelled away and therefore losing its value in real terms through inflation. Just be strict and don’t be tempted to use the card for anything other than emergencies.
4. Your workplace pension
If you’re planning to invest specifically for retirement and don’t need to access your money in the short term, a good place to start would be to increase your workplace pension contributions. This is because in most cases your contributions are taken from gross pay i.e. before tax. This is effectively a 20% gain when compared to placing the same amount in a savings account.
Some workplace pensions allow you to take greater control of where your pension pot is invested as opposed to the default pension fund. Retiready from Aegon UK is a good example of a workplace pension that has an online portal for individual investors.
It has a number of tools and calculators to help you set and achieve your goals. In addition, if you’d like to take more control, you’re able to select from a wide range of funds and build a well-balanced and diversified pension portfolio.
5. Research, Learn and Understand
To be a successful investor you need to fully understand what you’re getting yourself into. Learn the easy way by educating yourself rather than learning the hard way from your mistakes.
Many first-time investors get burned chasing quick gains by taking too much risk. Be sensible and learn how the professionals go about investing. You need to have a plan and start with small amounts to see if your strategy works.
Check out our good reads page. These books have made a massive difference to the way I think about and go about investing my own money.
Conclusion
Investing for the future can be both empowering and rewarding but as with most things in life preparation is key. Slow and steady wins the race, build your financial future on solid foundations and prepare for the unexpected.
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