If you want to start investing on the front foot, it pays to get your house in order first. Set yourself up for success before you start your investment journey and take the time to do these 4 things.
1. Review your finances
Take a good look at your income and expenditure. Figure out your assets and liabilities. Conduct an audit of your financial health. There may be areas where you can improve things to shift your balance sheet in a more favourable direction.
You're going to need this information to figure out how much you can afford to invest. It will also influence the investments that are appropriate for you. Those with assets in the form of property may seek diversification through share market investments, for example.
2. Pay down your debt
Interest rates on credit cards can be over 20%. If you are holding high interest debt such as credit card debt, or even personal or car loan debt, look to pay off your debt. The interest that will be charged on your debt is guaranteed, whereas returns on the share market are not.
Whether to pay off lower interest debt such as mortgage debt or use funds to invest is a matter of personal choice and circumstance. Banks offering home loans at interest rates as low as 4% are currently providing dividend yields of over 6%. Investing, however, carries a risk to capital and dividends are not guaranteed.
3. Understand your goals
It is important to understand your goals when investing. What are you seeking to achieve? It could be long term capital growth, or it could be generating a house deposit in a few years. Either way, a 5–7 year timeframe is recommended for investing in the stockmarket to allow volatility to be ridden out.
Your goals will influence the type of investments you chose, from asset class down to individual issuer. Those with longer term timeframes can afford to take greater risks as they have more time to ride out volatility in the market. Other investors may prioritise income over capital gains.
4. Have a plan
Once you have your goals and investment budget, you can begin to blend the two. Keeping in mind minimum trade limits, you can plan out an investment allocation that is within your budget and in line with your goals.
You will need to decide how much of your investment budget to invest in stocks, bonds, and property. If investing in shares, you can make decisions about how much money you want to put into large capitalisation versus small capitalisation shares, Australian versus international shares, and different sectors and industries.
Foolish takeaway
There's a lot to take in when starting investing. Taking the time to do these 4 things first will make sure you start on the right foot.
