Today I’m featuring a guest post from the people over at FundCalibre the independent online research centre and fund ratings agency, who are going to tell you what five considerations you need to make before investing. Remember with investing your capital is at risk.
Investing is a great way to steadily increase your capital, but it is, of course, not without its risks. People entering investment situations should carefully consider whether they are ready to do so, by first considering several key points; including current financial situation, whether debt is paid off and if you have sufficient financial assets to fall back on.
1. Examine your current financial status
The first thing to do before you even think about making any big investment decisions is to take a long hard look at where your finances are currently at. This will help you determine whether now is a good time to invest, or whether you need to wait until you are more financially secure.
You can start by undertaking a full financial audit, in which you examine all your monthly incoming and outgoing finances, helping you decide if there is anywhere you can make savings.
Start the audit by listing income, including your monthly salary, any savings you might have, any benefits you receive, your pension and any financial support from family. Next, be sure to list all your frequent expenditures. Here, you might notice areas where savings can be made, particularly if there are direct debits going out which you no longer use, or perhaps you can cut out your morning latte and make a brew in the office instead?
Once your personal financial audit is complete, you’ll be able to detect which of your outgoings are critical, such as bills. Those which are non-essential can be quickly dropped, or you can make savings by switching energy suppliers, for example. By making small changes to your finances, you could quickly be on a positive path to investing.
2. Settle your debts
Any good-quality financial advisor will seriously caution their clients against getting involved with investing before they have managed to pay off all their major debts, or at least before they are under control.
This is imperative as if you have a huge amount of debt to pay off, the investment gains expected will likely not be significant enough to outweigh your financial obligations. As such, make sure you have paid off personal loans and high-interest-rate credit cards before investing.
3. Ensure adequate protection
Imagine how terrible it would be to find yourself in the unfortunate situation of being made redundant or falling ill and therefore being out of work. Scenarios like these are why savvy investors will always ensure they have back-up plans in case of an unexpected turn of events which could adversely affect their financial situation.
Before investing, it is advisable to set up an emergency savings account with at least three to six months’ worth of wages in (depending on income), so that you can fall back on this capital if need be.
Moreover, potential investors can further protect themselves by getting life insurance or income replacement cover. Self-employed folk can opt for income protection insurance too.
4. Set your risk tolerance
Risk tolerance relates to how much risk you, as an investor, are willing to tolerate. Investments are, by their very nature, risky. However, on many occasions, bigger risks certainly equate to bigger returns.
It is, therefore, up to you to decide where your appetite for risk lies – can you afford to take great risks? Do you feel comfortable in doing so? These are the questions you need to ask yourself before you start investing so that you don’t end up biting off more than you can chew!
5. Learn from the professionals
FundCalibre, which specialises in investment fund research in London, recommends only kick-starting your investments once you have sought professional advice.
Financial advisers can help examine your current position, make recommendations and create a plan based on your individual financial goals. Moreover, they can help you recognise the associated risks with each type of investment you are considering.
Above all, you should always keep in mind the age-old saying, and by far the most important rule of investing; “only invest that which you can afford to lose.”