Three things to think about before you start investing
16 June 2021
Here’s a potential scenario: you’ve been investing for a few weeks, even months. You’re happy with your returns, you’re learning a lot, and everything’s generally going well.
Then, you hit a bump in the road. Maybe your car breaks down. Maybe you hit your spending limit before payday a few times in a row.
Things like this can result in you ‘raiding’ your investment money before you intended on cashing it in—also known as a time horizon. Not only can this potentially cost you returns, it can be really deflating! It can feel like you’re starting over again.
With that in mind, here are a few things to think about before you start investing: a budget, an emergency fund, and debt. If your financial plan deals with these things, you may find it easier to stick to—and grow!—an investing habit over time.
Create a budget overview
Choosing how much to invest maybe tricky. You may want to balance choosing an actionable amount to meet your goals, but not so much that you struggle to enjoy your day-to-day life. And it’s really easy to be overly optimistic and assume you need less to live on than you actually do.
A good way to avoid this is to set up a budget. It doesn’t have to be anything super complicated. Rather, it’s just a look at where money generally goes. What are big-ticket spending habits? Is it spent going out with friends? Or on a hobby? Or on something more mundane, like rent?
Making a budget gives more visibility over what’s happening financially. This helps with choosing an amount to invest that’s easier to stick to and doesn’t impact day-to-day spending too much.
Save up an emergency fund
Once a budget is outlined, it’s worth considering unexpected expenses that could present a setback in investing goals. For example: if you have a car, what will you do if it breaks down and costs a few hundred bucks to fix? Do you have funds to repair on hand, or would you have to crack into your investment?
If the answer is no, it may be worth considering setting up an emergency fund that gives a source of cash for those unexpected expenses outside of investment money.
Setting up an emergency fund may be something to consider starting before investing, but it can also be done in tandem. For example, if you have $100 a week left over after your expenses, you could invest $10, and put $90 towards an emergency fund.
Make a debt plan
Investing while you have debt can be a challenge. Depending on the debt’s interest rate, it may make more sense to pay off your debt instead of investing. However, as always, it’s up to you to decide what to do.
Like the emergency account situation we just talked about, you can potentially have it both ways as well. It may be a matter of putting some money toward paying off your debts, and some money towards investing. The specific amounts are up to you, and depend on how quickly you want to pay off your debt compared to how much you want to invest.
This helps you get into an investing habit.
Here’s the really cool thing: investing isn’t an ‘all or nothing’ proposition. You can invest as much or as little as you want. This is important, because even a little bit can make a difference.
So even if you have debts to pay off, or an emergency fund to save up for, you might still invest a little bit right away. Then, over time, you might choose to slowly increase the amount of money you invest regularly.
What’s more, Sharesies has no minimum investment amount. So if your budget, emergency fund savings, and debt situation mean you can only invest $1 a week right now, that’s okay! You can start with what you can afford, and a little bit of money each week forms a solid foundation for more growth, further down the track.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.