Investing is a risky business in which people should only enter into once they are fully prepared for each potential outcome. As such, there are several key factors to consider before taking on a serious financial investment, including thoroughly assessing your finances, paying off debt and protecting yourself from the unthinkable.
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Read more to understand each before deciding whether to part with your hard earned cash.
Examine your financial situation
Before making any investment decisions, it is advisable to take a candid look at your whole financial situation and decide whether now is the right time for you to invest. Carrying out a full examination of your ingoing and outgoing finances per month is a good place to state and will allow you to get a clear picture of what you’re at, whilst discovering areas in which savings could be made.
You can begin by listing all your income sources, such as salary, savings, benefits, pensions and any financial support you might receive regularly from family. Next up, work through your previous bank account statements and list all your regular expenditures, making sure to take note of any standing orders and direct debits that go out, particularly if they are old and you no longer use them.
Once you’ve done this, you can decide which outgoings are essential, and which you can make savings on by getting rid of or by switching suppliers. You’ll often be surprised at how much you spend on things you do not need or rarely make use of, and by ridding yourself of those added costs, you could be on the right path to investing.
Pay off major debts
Any financial adviser will warn against investing before your major debts are paid off, or at least under manageable control. This is crucial, because if you have a significant amount of outstanding debt they will likely outweigh any of the returns you can expect to gain from your investments. Paying off debts on personal loans and credit cards which have high interest rates is, therefore, a wise idea.
Protect yourself
Any smart investor will tell you to start a backup savings fund to protect yourself in the case of an unexpected turn of events, such as unemployment or falling ill. As a general rule, having between three to six months’ worth of income to fall back on via an emergency savings account is wise, and this should remain untouched and separate from your investment funds.
You should also think about getting yourself covered by life insurance or income replacement cover. If you are self-employed, you might want to consider income protection insurance.
Determine your risk tolerance
Investing in anything is always a risk and the old saying certainly rings true – you should only invest that which you can afford to lose. However, more risk often means better returns. That being said, not everyone can afford to take big risks with their capital, nor may they feel comfortable doing so. It is up to you to decide what your risk tolerance is and act accordingly.
Seek professional advice
For first-time investors, skilled advice from the beginning is a very smart move and may be more than enough to help you get the ball rolling. Financial advisers can help examine your situation and create a solid plan of action based on your goals. They will also help you understand the risks associated with any investment you might be considering.
Moreover, there are many enterprises out there which can help you decide where to invest and whether an investment is good enough, such as an investment fund research company.
Remember, investing is risky business and on many occasions, you may receive less than what you put in. If you are not sure whether to invest, seek expert advice!
