Investing is a liberating feeling. Besides starting your own business it’s one of the best ways you can start to grow your own net worth. But before you start investing there are a few things you should take into consideration so that you set yourself on the right track.
Investing is amazing when you get it right, but you need to always remember your capital is at risk and whilst the rewards can be very lucrative mistakes can cost you. So start investing my first fully preparing yourself.
1. Get your Finances in Order First
First things first, before starting out you need to get your finances in order otherwise stock market investments are kind of pointless. Make sure you have these things in order:
Pay off any high interest debts
If you have high-interest debts, specifically over 8-9% then you should seriously consider paying these off first. As initially, you are very unlikely to beat these with the stock market returns. You don’t need an investment quote to tell you this is a good idea.
Think of it this way if you have debt that is 9% interest, paying this off is the equivalent to investing in the stock market and making this in returns.
The S&P 500, an index of large American stocks, has provided an average return of 9.8% over the past century or so. Depending on your risk tolerance, you should aim to pay down any debt charging an interest rate near or higher than that.
Have an Emergency Fund
If you are serious about investing for the long term then to be able to do that you have to leave that invested money alone, specifically for at least 3-5 years. This is so you can benefit from the inevitable stock market ups and downs.
Now in order to be able to leave your stock market investments invested you need to also have savings you can access instantly for any rainy day.
The worst thing to happen would be having to sell stocks at a market low because you needed some cash fast, that’s not smart investing.
So first make sure you have some emergency funds stashed away. Many financial experts recommend you should have between 3-6 months of expenses kept in a cash equivalent account.
This means should the worst happen and you lose your job then you can still leave your investments save and have money to be able to carry on your day today.
Join Company Retirement Scheme
If you haven’t already joined your company retirement scheme then do also look into this. The reason being is that most companies will match your contributions so if one of your reasons for investing is for retirement then you should do this first.
It will mean you have an even better investment return.
2. Sign Up to a Zero-Commission Online Broker
You physically can’t start investing without a broker. If you don’t already have a broker then make sure you use one that doesn’t charge you fees. Take advantage of the world we live in now and sign with a broker that won’t charge you commission fees to buy stocks.
This means that the money you earn goes straight back in your pocket where it belongs. It also means you can easily keep track of your investments by using the easy to use apps.
3. Build Your Knowledge
As I said at the start I would always recommend that anyone who wants to start investing should go in with open eyes and a bit of knowledge. Yes, it’s a very rewarding place but it can also be a place of sorrow if underestimated.
For this reason, I would say it’s good to do some of your own research and build up knowledge initially. I personally choose to read books and continue to do so. The 2 I would recommend initially are Rich dad, poor dad and Intelligent Investor.
4. Start With Basic ETF Funds for Less Risk
If you spend time building your knowledge then you will no doubt come across ETFs. This is in my opinion a good place to start investing.
When you are just starting out if you want a safe bet then Index funds or ETFs (exchange-traded funds) are a good place to start. The S&P 500 index fund for example measures the overall success of all of the S&P 500 companies.
This means lower risk for you and being able to invest in lots of companies with one stock. Of course, no stock is risk-free even the S&P 500 has had years of losses but it’s backed by good years of gains, it is just known as having the best track record. This is another reason to always play the long term game. See further down for further details on the S&P 500.
5. Subscribe to Stock Advisor Service if you Want Stock Picks
This is of course a personal choice, but I have included it on this list because it has worked well for me. It has helped me, more than anything save time researching every stock because all of this is already done for me. I personally use Motley Fools Stock advisor.
If you are just starting out and are not sure which Stocks are worth investing in then it’s good to get tips from experts. You do pay for a service like this but for me, it’s been more than worth it as it has allowed investment in stocks that have delivered good profits. What you get is a monthly report of up to date stock picks
Benefits of using a stock advisor service like Motley Fool are:
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6. Use the 50/30/20 Budgeting rule to set investing goals
If you want to know how much to put aside each month for savings a good model to use is the 50/30/20 budgeting rule. This goes on the basis that 50% of your income should be put aside for your essential bills i.e. bills you have no option to pay to live. 30% should go towards any wants like a gym membership or dining out. Then the final 20% should be used for savings.
Depending on where you are with your rainy day savings fund i.e. savings you can access quickly should any unforeseen bills happen, you may want to consider splitting your savings into 2 pots. For example, 10% could go towards your rainy day fund and 10% each month into your stock account.
Pro tip: Make sure anything that is in your essentials pot is an essential and not a want. For example, say you have a car on finance and you could have gone for a cheaper car but choose a more expensive one. Part of this payment should come out of your 30% wants calculation because you didn’t necessarily need the more expensive car.
7. You need to know the market has ups and downs
You will never time the market, you matter how hard you try!
Understand that for some months or years that the market will be up and for others, it will be up massively. This is why it’s important to invest for the long term so that you can weather the storms that are part of the package.
Let’s take the S&P 500 which is a benchmark of American stock market performance (a safe ETF stock to invest in by the way) this ETF has an average annual return rate of around 10%. Not bad at all but if you see in the chart below even at these great returns it is an average over years.
Invest for the long term and get the know the stocks you are investing in so you don’t sell at the wrong time.
Bottom line to start investing
Investing is rewarding and amazing when you get it right. This article shows you that it can be very easy to start investing even with little capital. But you should go into investing with your eyes opened so that you are set up to be a profitable investor.
Although this list is not exhaustive they are tools that have helped me in the past with my investing strategy.
What do you think, will you be giving investing a go?