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Five things to consider before you start investing

If you’re considering investing, it’s vital to get your finances in order before you begin. Check through these points to make sure you’re prepared.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How to audit your personal finances.
  • Why you should try to clear debts before you start investing.
  • Where to look for help when it comes to putting together an action plan.

You shouldn’t think about investing money if doing so means risking the clothes off your back, or the roof over your head. The money you use for your investments should never come from the pot earmarked for paying the mortgage, or other essential household bills.

Many of us don’t keep a close track of our incomings and outgoings. But you can’t begin to work out how much money you can afford to put aside for investments until you are fully on top of exactly what’s coming in to your bank account, what’s leaving it and where this money is going.

1. Put your money through a financial audit

Undertaking a full audit of your personal finances may not be the most exciting way to spend your time, but it’s well worth doing. Not only will it give you a clear view of the real state of your finances, but you may also identify areas where you can make savings.

Start by making a list of all your income. This will include your salary, any freelance fees, income from existing investments, interest from savings, as well as grants, pensions, benefits and any financial support relatives might provide. Make a note of when you receive this income and whether this is weekly, monthly, quarterly or annually.

Your next step should be to go through your bank statements and add up all your regular outgoings. It’s worth going back a few months in case there are payments that don’t go out every month. And, it’s a good idea to review direct debits and standing orders coming out of your account at the same time, as you may be paying for things you no longer need or use, such as magazine subscriptions or gym membership.

Once you’ve listed all your outgoings, divide your expenditure into essential and non-essential categories, and look at ways you might be able to reduce your outgoings. For example, could you switch to a cheaper gas or electricity supplier, or might you be able to do without a landline if you usually rely on your mobile?

The savings you make by reviewing these outgoings could be the start of your fund for investments.

2. Neither a borrower nor a lender be

A key part of any personal finance audit will be to add up the accumulated debt on all your credit cards and work out how you can pay it off. If you want investments to become a way of making and earning money, you should try to pay off your debts first. The same resolve should be applied to any personal loans you’ve taken out. Debt of this kind can be a millstone around your neck preventing you from starting out as an investor. Borrowing to invest or investing to borrow can be a fast road to financial ruin. Don’t do either.

3. Rainy days and Mondays emergency account

The money you set aside for investing should never be money that doubles up as an emergency savings fund. Investment money should be held over a long-term period – think at least five years as a minimum.

You should, therefore, have some savings kept separate which are immediately accessible to pay unexpected bills – for example, if you need to fix a leaky roof, or take an emergency flight to visit a sick relative. Establishing an emergency or rainy day fund must be a priority before you start investing.

Once such a fund has been built up, you can be confident that there won’t be a call on the money you have set aside for investments.

4. Shore up the right levels of protection

The financial audit process should also reveal where there are any gaps in your finances. For many this will be adequate insurance that would ease the financial strain if something goes wrong. Consider, for example, the financial impact on your family if the breadwinner lost their job, became too ill to work, suffered an accident, or if there was an unexpected death in the family. Have you got the right life insurance in place to protect you financially should the worst happen? What about income replacement cover if there’s a prolonged break in employment?

5. The kind of advice worth its weight in gold?

Sound professional advice can be just the right input you need to work through your financial audit and steer you towards an action plan. A professional adviser will be able to point out what’s missing from your financial plans, and help you identify financial goals and how your investments may achieve them.

Many investors feel confident enough to make their own decisions, but remember you don’t have to engage a professional adviser for your entire investing life. For some, expert input at the outset may be all it takes to get them going, while others may feel more comfortable receiving regular advice. Remember, too, whether you take advice or not, the investments you hold can fall in value as well as rise; you may get back less than you invest.

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Tempting as it may be to plunge straight into investing, you may need to address other aspects of your personal finances first. In this section, you'll learn more about some of the things you should take into consideration before putting your money to work.

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