The sooner you start investing, the more time there is to see those stocks grow. With a little planning and these handy tips, you’ll be on your way to a brighter financial future.
It’s easy to get caught up in the excitement of making money and jump straight into it. But investing should be based on logic, not emotion, to get the best returns.
The first step is to set clear goals: why you want to invest and what you want to achieve. It may be to create an additional source of income, to retire early, or to save for a large post. These goals determine your investment approach.
Once your goals are clear, these five tips will help you achieve them:
1. Consider your options
What is right for your friend/relative/hairdresser may not necessarily be right for you. It’s important to consider all of the available options and see which ones best suit your goals.
There are many types of investments, each with their own advantages and disadvantages, such as:
Real estate – residential or commercial
shares
Managed Funds/Public Traded/Private Investment Trusts
Collectibles – e.g. wine, art
Precious metals – gold, silver, palladium
Bitcoin
Foreign Currencies
Home Improvements – Increase the equity of your home if you own it.
companies/startups
Think about your risk tolerance (ie how much risk you’re comfortable with) and your life stage as these can help you decide where to put your money.
For example, you can generally take more risks when you are younger because you have less to lose and more years of work to make up for losses.
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2. Get advice
Getting tailored advice from a qualified, licensed, practicing financial advisor is a sound investment in itself.
Understanding what you are doing when investing money is crucial. But finance is complex and you don’t know what you don’t know.
There are numerous factors to consider, including:
Steer: Assets are taxed differently and may incur stamp duty, capital gains tax (CGT) or other taxes.
Costs: Both for the purchase and ongoing maintenance/legal/accounting costs.
Legislation: The rules are very different and change over time.
Government Incentives: eg super allowances, tax rebates.
Protection of your investments: Risk mitigation strategies, relevant insurance, contingency plans.
Pension: Which fund? Is a self-managed super fund (SMSF) suitable?
Getting these right from the start can save you thousands (or more) in unnecessary taxes and lost revenue.
3. Only invest what you can afford
You’ve probably heard this expression before, and with good reason.
Go through your budget and calculate how much you can realistically afford to invest. Factor in all work and household expenses and some fun money as well.
If everything goes according to plan, your investments will increase in value over time. But they shouldn’t affect your ability to support your family if they go broke.
Also, take a look at your debt. It may be better to invest excess cash into paying off your debts — credit cards, loans, and tax debts. There is no risk of losing money this way and you are in a better financial position to invest in the future.
4. Determine your exit strategy
Your goals determine when and how you want to access the proceeds of your investments. Many new investors overlook this.
Shares can be sold at the push of a button, but real estate sales can take weeks or months. Selling a business depends on finding a buyer. The old-age pension generally cannot be touched until you retire.
Make a plan of when you want to sell each investment and how you will go about it. Remember that there are selling costs that can wipe out your profit if you didn’t anticipate them.
5. Invest in an emergency fund
As COVID-19 has shown us, unexpected things can and do happen – your income could disappear, your business could become inoperable or investments become effectively worthless. If an unforeseen event or health crisis strikes, how will you keep a roof over your head?
Don’t start until you’ve set up your emergency fund. While three months seemed reasonable earlier, COVID-19 has shown us that many have to put at least six months of income aside.
You’ll be grateful it’s there should you ever need to rely on it. And if you never do, great! You have extra money set aside for retirement or when the time is right to invest.
An emergency cash stash really is the smartest investment you will ever make because no one wants to be forced to sell anything.
Note that this is general advice only and you should seek advice specific to your circumstances.
Written by Helen Baker, an Australian Licensed Financial Advisor and author of two books: On Your Own Two Feet – Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce – Your Survive and Thrive Financial Guide. Proceeds from the sale of the books are donated to charities that support underprivileged women. Helen is in the 1% of financial planners who have a master’s degree in this field. Learn more at
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