What to do Before you Start Investing

Confidence is key. So make sure to do these things before hitting ‘buy’ on your first investment

Maria Collinge
January 24, 2023
Finetuning your personal finances is the key to becoming a successful investor. Focus on that first (Image: Female Invest)
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Starting your investing journey can be both a nerve-wracking and exciting experience. But once you begin, you will probably find starting investing easier than you first thought, and it’s actually a lot of fun too! However, before you make that first investment, there are a number of things we recommend you do.

Define your goals

First things first: defining your goals. Start thinking about where you want to be in five, 10 and even 15 years time. Think about why you’re investing before you start. Is it because you want the keys to your first property in 5 years time, or are you looking to retire in 15? 

Some of the more common types of financial goals include:

  • Retirement
  • Emergency funding
  • Family planning
  • Education planning
  • Life events (e.g a wedding or vacation)

These are key questions to consider. Then it’s crucial to look at your goals and think what that means financially. How much money do you need to have saved when five years time comes around? Knowing where you’re going is key, but knowing what you need to get there is crucial.

First step is defining your goals. The next step is knowing your time horizon (Image: Female Invest)

Know your time horizon

Before you start investing, it’s important to establish a strategy: in other words, your time horizon. This simply means how long you plan to hold a security to meet your goals. Selecting a time horizon is pretty black and white. Let’s say you plan to retire next year, you’ll have a time horizon of 24 months in the stock market before withdrawing the cash in the form of capital gains or dividends.

However, if you don’t need to withdraw your money anytime soon, a longer time horizon may be more sufficient to meet your life goals. When investors have longer time horizons, they generally take on more risk. This is because the extended amount of time allows the market to recover from a downturn.

Assess your risk profile

Before you start investing, get clear on your "why?". Because it’s crucial in determining what you should invest in. So how do you do that?

Getting clear on your strategy is a must.

There is a method to the madness which can help you nail down where you are on the scale. If you have a long time horizon - which is when you're investing with at least 5 years time horizon (it could even be 10, 20 or longer), the logic follows that you're able to adopt more risk because you have the time to recover from temporary drops in the market, and which you're more than likely face on this rollercoaster journey of investing. But if you know that you'll be needing your invested money soon, say if you're nearing retirement for example, you should limit your risk as you won't have as much time on your side to recover from any temporary losses.

As a rule of thumb, if you have a longer time horizon you can take on more risk than if you know you’ll be needing your invested money soon.  So before deciding what to invest in, it’s worth getting clear about your strategy, and therefore, your risk appetite.

Build an F*** U Fund

Having a pot of money to deal with life’s unanticipated emergencies is key if you want to invest your money with confidence. So before investing, it’s important to have an emergency fund you can withdraw at any time. 

As a general rule of thumb, three to six months of your salary is a sufficient amount, but it’s open to your own discretion and what you feel comfortable with before entering the stock market and should give you the confidence to combat financial emergencies in your household. Think about the times when your washing machine suddenly packs in, or when you suddenly get invoiced a bulk of money for your car repairs. Make sure you’re in a position to deal with them head on before investing. 

Understand the investing basics

Before embarking on your investment journey, it’s crucial to hone in on the investing basics. There are lots of terms and acronyms that get thrown about, and there are some crucial strategies to be aware of such as diversification, risk appetite, how to choose a trading platform and picking a winning stock that deserve some of your time before jumping in. Hitting ‘buy’ on your first investment deserves to be done with confidence, so make sure to spend some time learning the basics first.

Focus on learning the investing basics first. No one should be entering the stock market blind folded (Image: Female Invest)

Thankfully, we’ve simplified the entire process through our unrivalled learning universe which covers everything from personal finance, investing and sustainable investing. You can also educate yourself on the types of investments available to investors by reading all the articles here.

Go through your budget!

Getting a 360 degree view of your finances is key before making your first investment. To do that, go through your bank statements from the last six to 12 months to get a sense of what you have coming in, and what are your expenses. This is not an exercise to make you feel bad about your spending, but rather to make sure you have an accurate overview of your finances. Once you have done this, create a budget and make sure to be realistic.

We always advocate for the 50/30/20 rule – a budgeting framework that is realistic and sustainable. That means 50% of your take-home pay should go towards must-have expenses like your rent and transport; 30%for fun, because you have to have fun; and 20% goes towards the future you – this includes investing and saving.

Consider using a budgeting template

The best way to build a budget that is easy to review and is trackable. Our downloadable 50/30/20 budgeting template is a great start. Excel not your forte? Not to worry - we've made it easy for you to get started. All you have to do is insert your own numbers. Simple! Get your own budget template here and get started on making a budget you can actually stick to.

Pay off any high-interest debt you have before you do anything else!

Debt carries interest, so before starting to invest, it’s crucial you start paying off high-interest debt. Because the more time you spend paying interest, the more that money will eat away at your investment wins. Overall, debt can be anything from debit card overdrafts, to student loans and mortgages. But before paying off debt, it’s important to distinguish between good and bad debt.

Good debt

Good debt is debt that’s valuable. Take a student loan for instance which is money you borrow to get a degree. Even though it’s debt, it enables you to get a better degree, and therefore a better job. The same goes for a house mortgage – it gives you a roof over your head and it can be sold later on, perhaps even with a profit. 

Bad debt

Before investing, you should focus on paying back double digit interest rates (debt higher than 7 to 10%). This should be paid off quickly before deciding to invest. Let’s say, for example, you have a mortgage with an interest rate of 5% and a stock market index that is returning 10% a year, you’ll come out ahead by investing your extra cash in the index fund. But if you have a car loan with an interest of 18%, and a return of 10%t that year, you wouldn’t have benefitted from putting the money in the index fund. It is unlikely that you will be able to get a double-digit return in the stock market, and therefore you would actually do better to pay off your loan first.

Think about your retirement savings!

Everyone deserves to live their retirement dreams, so putting some money into a retirement fund is key before starting to invest. If you’re at the beginning of your career, you’re probably not thinking about retirement or what kind of lifestyle you want when you get to that point. But that doesn't mean that you shouldn't start preparing for it. So make sure you are on track with your pension fund or retirement savings before starting to invest. 

Make sure you are on track with your pension fund or retirement savings before starting to invest (Photo: Harli Marten/Unsplash)

You can do this by looking at your current contributions and assessing how close you are to your goal and if you’re not close, consider opening a retirement fund. A retirement account enables you to invest consistently in stocks, bonds, investment funds, or something else, with the intention of growing over time. Depending on your pension plan and how you save for retirement, you should also make sure that all of your retirement savings are deposited in one pension fund, so that you are not paying administration costs to several different companies/funds. This is especially relevant if you are young and have already switched employers a few times.

Now, if you can’t make the math happen right away, that’s okay. Starting slow with investing is fine. It’s all about making it a habit by setting aside a certain amount to be invested each month. Try investing 1%if that’s all you can, or 5% now and then increase it in the future when you get a raise.

The bottom line

You shouldn’t walk into investing fearful, which is why you need to tick off the above tasks before plunging into the stock market. Knowing your goals, setting a budget and ensuring you have retirement savings, means you have the backbone to prevent you from making bad investment decisions. So by following these simple steps, you’re one step closer to making that first investment. Want a thorough step-by-step guide? Take a look at our membership platform which will walk you into buying your first investment from start to finish.