As a new and/ or passive investor, before you invest your first dollar, there are 3 things to do before investing:
Education is the most important factor in early investing success. If you are a new investor, you may not know where to look for quality, unbiased investing information and advice. While there are many resources online, the first place to start is with our national financial education program Money Sense. All the articles are free and written specifically for Singaporeans.
Of course, the writing tends to be dry and academic making it difficult to understand or absorb at lot of the time, which is why it is a good idea to go through this guide first.
Not only will educating yourself help you feel less overwhelmed when it comes to investing, it should also help your bottom line because you’ll learn how to recognize high-fee investments, avoid them and move toward a successful investment strategy.
One of the fundamental rules in investing is: “Do not invest in anything you do not understand”. Even the most seasoned professional investors follow this rule.
Think about this way: Would you lend your hard-earned money to someone you do not know? You might give money to someone you don’t know as a form of charity but it is highly unlikely you will lend someone money with the expectation to get your money back, let alone with interest.
However, do not abuse the rule. Not understanding is not an excuse for not ever educating yourself and learning how to invest. The purpose of the rule is to ensure that you do not make investments that have little chance of doing well or worse, be fall prey to investment scams.
It is also recommended that you get your information from multiple sources to cross reference information and seek out different perspectives and opinions. There is no one way to investing but some ways are better than others. Read books, search the Internet and talk to experienced investors or financial advisers.
Be Covered for Emergencies
There are two parts to this point.
The first is to ensure that you have adequate health insurance. A major medical problem can potentially wipe out any savings that you have if you are not covered. This may include pulling out from investments that had good potential of doing well. This is the most likely problem that you can face especially as you get older and closer to retirement age. So, be sure to be adequately insured.
Save Up an Emergency Fund before Investing
It is often advised that you should have at least 3 – 6 months of cash savings before you invest your first dollar. This is excellent advice as any money you invest should be money you can afford to “put away” for an extended period of time. Your investments should be the last things you “cash out” if you want to ensure healthy returns over the long run.
The emergency fund is to cover all your regular living expenses in the unforeseen event that you get retrenched or suffer some form of physical injury or prolonged illness that prevents you from working and drawing your regular income.
However, this does not mean you need to only put your money in your bank’s savings account. I elaborate on this in Chapter 3 and offer other instruments available for you to put your cash in.
Pay off Credit Card Debt
Before putting your money into investments, you need to pay off your credit card debt first, otherwise, you will likely not make any money, even if your investments do well.
The reason is that the credit cards’ interest rates are higher than the average return on your typical investments. Many credit cards have an annual interest rate of 18% or more. A good return on investment is about 8 – 10%. A return is considered very good if it is 15% or more.
Let’s say you have $5,000 to invest, but you also have $5,000 debt on your credit cards with an average annual interest rate of 18%. If you choose to invest this $5000, you will have to get an almost-impossible 18% return, within a year, just to break even on that $5,000.
So, pay the credit card debt off first before you think about investing.