A Beginner’s Guide: Before You Start Investing

Published on April 16, 2018 1:45 am, by

Investing is a bit like the latest health fad: everyone wants a piece of it, but secretly no one really seems to understand it.

Here’s the thing though. It doesn’t make sense to jump onto a whole new health regime if you’re not set up and ready for it, right? There is some prep work required. We’ve all done it: signed up for some juice detox, bought all the veggies and realised…wait, you don’t have a juicer (No? Was that just me??). It’s the same deal with investing. To actually get value from it, you need to set yourself up for success. Otherwise, you could be doing more harm than good.

Before you are financially ready to start investing, there are some important boxes to tick:

1. Figure out how much is going in & how much is going out

Here’s the reality: most people don’t know how much money they spend or what they spend it on. Why is this a problem? If you don’t know how much money you’ve spent, it’s hard to figure out how much is leftover that you can afford to put into savings or investments.

This can be a confronting step for a lot of people. It might seem like hard work (‘how do you track all that money??’), but it doesn’t have to be difficult. There are apps available today that sync to your bank account and automatically track your spending (ahem, yes MoneyBrilliant is one of them). This makes it very easy to have an accurate picture of your money without having to write everything into a spreadsheet!

2. Pay off your credit card debt!

WAIT! Don’t skip this step. I know you’ve probably heard this a hundred times, but I want to explain why this is so very, very important.

When you invest, you’re looking to grow your money, right? You want to earn money on your investment. Usually, how much you’ve earned on your investment is calculated as a percentage (e.g. you might earn 2 – 3% interest on your savings in the bank).

Now, the average credit card interest rate in Australia is about 16%. That’s very high. In fact, it’s higher than the return on most balanced (and even growth) investment funds. It can be difficult to find investments that will consistently return 16%, and those higher return investments usually also come with higher risks.

So say you put your money into an investment fund and over a year it returns 9%, but you still have a credit card debt for which you’re paying 16% interest. You’re actually losing money overall. So basically, it makes no sense to start investing if you’re paying more (in credit card interest) than you’re earning on investments. Capiche?

3. Have an emergency fund

This one is important to getting sleep at night. Investments come with risk. You can take less risk, or more risk, but if you’re investing it comes with some degree of risk. Markets go up and down, so sometimes you’ll lose money. That’s okay.

What’s not okay is if you put all your money into investments, and have no savings to fall back on. What happens if you’re in a car crash and you need extra cash for repairs? Or you break a leg and need to pay medical costs?

Once your money is invested, it becomes a bit less accessible. If you buy a house, you can’t sell it overnight. If you invest in shares, you don’t want to pull your money out during a bad time in the market. So having an emergency fund gives you the peace of mind that you have access to quick cash if you need it.

4. Sort out your insurance

What? What does insurance have to do with investing?? I hear you, it’s confusing. I’ll explain. For starters, I’m only talking about personal insurances (Life, Trauma, Total & Permanent Disability, and Income Protection)…the insurances that protect you as a person.

What would happen if tomorrow you lost your ability to earn an income? It’s morbid to think about, but say you got cancer, or got hit by a bus (God forbid!). If you lose your income, your costs don’t disappear (unfortunately). You still have to pay your living expenses, you might have kids to pay for, and medical costs as well.

If you don’t have life insurance, all those costs are likely going to be paid with your savings. But what if you put all your savings into an investment? Therein lies the problem. If you don’t have life insurance, you need more of an emergency buffer. You may not be able to afford the risk of putting the majority of your savings into investments.

5. Update & consolidate your superannuation

If you’re keen on investing, you should be keen on superannuation…because superannuation is investing. Literally. A portion of your income is put into a super fund, and your super fund invests that money on your behalf with the aim of growing your money for retirement.

I know retirement seems so far away, but it makes sense to take care of money that is already invested before you start investing extra. Might as well make the most of it, right?

So what exactly do you need to look for in your super fund? Here are a few starting points:

  • First, if you have more than one superannuation fund, it means you’re paying additional administration fees for each super fund that you have. No one likes fees. Review your super funds to figure out which ones you really want to keep, and consolidate the rest.
  • Before you consolidate, make sure you check the insurance that comes with your super fund so that you don’t accidentally cancel a really important policy!
  • Check to see what ‘portfolio’ your investments are in: are they in a conservative, balanced, or high growth portfolio? Take some time to understand which is the right portfolio for you, and update your super investments accordingly.

If you’ve never invested before, getting familiar with how super funds invest can be a great way to dip your toe in the water.

As sexy and exciting as investing sounds, it’s not a magic button to riches. Getting the ‘boring’ stuff right before you start investing will go a long way in ensuring that your financial health is strong, stable and secure. Just the same way that, as exciting as new fitness fads might be, most of us probably just need to eat less junk, drink more water, and stop sitting at our desks so much. The boring stuff.

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Paridhi Jain is the Founder of SkilledSmart, a ‘money school for adults’ in Sydney. SkilledSmart’s educational programs on money & wealth are taught by experienced financial professionals and focus on developing practical money skills for everyday life.

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