Investing in ASX shares as a first-timer is exciting. You can finally put some hard-earned cash to work and start building your financial future.
ASIC recently reported a noticeable increase in trading from everyday investors like you and me in the March bear market. That's great news as more people are gaining an interest in the Aussie share market.
However, investing is not for everyone. How, where and when you invest will vary depending on your age, net worth, future plans and many other factors.
Here's a quick guide to check whether you're ready to invest in ASX shares in 2020.
Pay off your debts
It's easy to get ahead of yourself when looking to invest in ASX shares. However, paying off personal and unproductive debt like credit cards or auto loans is often a better use of money.
Credit card interest rates can be in excess of 20% per annum. You're unlikely to generate that sort of return consistently with ASX shares.
Paying off expensive, interest-accruing debts means less obligations to the banks. This will generally mean less stress and more freedom to invest in ASX shares as you like.
Build up an emergency fund
One thing that people are feeling right now is FOMO. The S&P/ASX 200 Index (ASX: XJO) has climbed around 34% higher since 23 March.
That means many first time investors are worried they're missing out on potential gains. But as a long-term investor, you don't want to be forced to sell.
It's a wise move to build up an emergency fund of 3-12 months worth of living expenses, depending on your circumstances. Having this liquid (i.e. cash) emergency fund means you can invest in ASX shares knowing you can handle the odd unexpected expense.
There's nothing worse than buying a hot stock like Afterpay Ltd (ASX: APT) and being forced to sell at a bad time because of liquidity issues.
Buy your favourite ASX shares!
Once you're debt-free and have a decent emergency fund, it's time to look at the markets.
If you're a first-timer, I think diversification is key. You want to spread your portfolio risk across a number of ASX shares, to begin with.
That could mean a low cost, diversified exchange-traded fund (ETF) like BetaShares Australia 200 ETF (ASX: A200) could be a good option.
The fund has a management fee of just 0.07% per annum and attempts to track the benchmark index.
If you're after more concentrated positions, blue-chip shares like BHP Group Ltd (ASX: BHP) or Commonwealth Bank of Australia (ASX: CBA) have historically been portfolio staples.
Foolish takeaway
While it's easy to get excited as a first-time investor, it's best to take a step back and breathe.
The share market will still be there in a few months' time. There will still be good ASX shares to buy.
By paying down your debts and building up an emergency fund, you will be able to confidently invest in your favourite companies knowing that you're well set up for the future.
