How Investment-Ready Are You?

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How Investment-Ready Are You?

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We all must’ve heard at some point or the other that we should invest to grow our money. And there’s nothing wrong with that advice. Yes, we should invest. But only when we can afford it.

It’s far too common for people to feel the pressure when they receive “investment advice” and take rash financial decisions based on them which ultimately jeopardise the very wealth they wish to grow through investments.

Thus it’s critical we take stock of where we stand financially before we decide on investments. This blog will give you helpful insights to find out how investment-ready you are.

Find where you stand financially

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Many financial experts call it “the net worth” of an individual. You can calculate your “net worth” if you add up all that you own (savings, assets like home or car, etc.) and subtract it with all that you owe (credit card debt, dues on a personal loan, education loan, etc). What remains is your net worth. And it’s your net worth that should play a major role in deciding whether you should invest a portion of your money or not.

Chances are, you’ll realise you are under considerable debt (reality check, anyone?). If that’s the case your first objective must be to take immediate steps to get rid of high-interest debts before you start investing (and reach a breakeven point).

Becoming debt-free may be a real challenge (depending on your debt situation), but by no means impossible. Let’s discuss some fundamental tips in the next point.

Related: A Beginner’s Guide to Fixed Deposits (With Infographic)

Prioritise debt reduction over investment

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If you’re under considerable debt (i.e. if your total debt, excluding home mortgage, is half or more of your annual income), you’re not that investment-ready. You should rather focus on getting rid of your high-interest debt first.

American personal finance blogger and author Trent Hamm of The Simple Dollar has this interesting insight in one of his blogs: “Making an extra payment on a credit card with a 15% interest rate is functionally the same as making an investment that returns 15% per year after taxes. If you pay off $100 of that balance, that’s $15 in interest charges that you don’t have to pay each year until the card is paid off. There is no investment out there that can even come close to that with any consistency”.

Take some time to read our blog 5 Useful Tips to Become Debt-Free, a detailed guide on how you should go about building your counter-debt strategy.

Related: ASB Investment FAQ: How to Buy Units, How Lucrative Are They?

Secure your financial base

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The only predictable thing with life is its unpredictability, but if you stay far-sighted and alert, you won’t lose control over the steering wheel even if the road sees a sudden speed-breaker or an unanticipated turn. Having in place a considerable sum of money in an emergency fund is a proof of your financial farsightedness, and securing that is essential before you embark upon your investment journey.

A sudden job loss or sickness may actually throw your finances out of gear, but an emergency fund will act as a life jacket and keep you afloat. So, how much money should you ideally have in an emergency fund? Do fixed deposits or property qualify as an emergency fund? Read our detailed blog for all the answers as it gives some useful tips on how to build an emergency fund.

Similarly, a sudden health issue can drain your finances apart from extending physical and psychological discomfort. Consider taking up a health insurance policy to protect your money in the event of an illness or accident.

Related: 6 Common Biases That Hurt Your Investment Decisions and How to Overcome Them

Set clear financial goals, and strategise accordingly

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Setting clear financial goals lies at the heart of investing, and should ideally be the guiding light of your financial journey. So, what is the purpose of your investments? What are your short-term and long-term goals? Do you want to invest to buy a house, to fund your child’s education, or to retire? Or something else?

Having clear answers to all these questions will help you make important decisions like what you should invest in, for how long, and how much risk you should take.

For example, if you want to build a home down payment fund, just putting all your money in a fixed deposit may not be the best idea. A fixed deposit is less risky, and thus gives you a lower return than riskier financial instruments like unit trusts, stocks, commodities, etc.

Instead, you should set a target down payment amount (based on research and your budget) and give yourself a fixed timeframe to raise that amount (say 3 years). Then see how much should you invest in which instrument (or a combination of instruments) in order to achieve that goal. You may find that if you invest a portion of your money in a 3.5% return FD for 3 years, and another portion in an 8+% unit trust like ASB (only for Bumiputeras), you’ll be able to raise that amount without exorbitantly increasing the risk factor.

Another important point to note is that if you’re married, you must rope in your spouse and his/her interests in your financial goals as well. Discuss your plans with your spouse and go ahead only when you have him/her on board.

Related: 9 Essential Questions About Fixed Deposits That Everyone Needs to Ask Before Investing

Understand your investments

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Good returns are the driving force of investments. But in order to secure them, you must go through a path full of dualities (like risk vs. returns, short-term goals vs. long-term objectives, etc.) where financial knowledge will be your only torchlight. Only once you understand your investment options will you be able to identify your comfort zone, risk appetite, investment ambit, etc. With adequate knowledge and financial experience, you’ll also be able to gradually expand your comfort zone and investment ambit to accommodate riskier investments.

So research and financial understanding are very important as every investment tool comes with its own set of pros and cons, and may work differently for different people in achieving their financial goals.

Here are some vital pointers that you must consider before choosing any investment tool:

Investment horizon: How long can you keep your money invested?

Investment capital: How much can you afford to invest? Or, what can be the best investment instrument for the amount of money you have?

Investment liquidity: How easily can you sell or withdraw your investment and convert it into cash?

Investment returns: How much will be the returns and after how long? Will the returns be worth the wait, if you factor in inflation?

Investment risks: How much risk can you afford to take? How much loss can you bear? Where shall you invest to minimise risk?

Investment credibility: How credible or secure is your chosen tool? How sure are you it’s not a scam? Does the government have a role in securing your chosen investment instrument?

Investment options: Should you invest in low-risk FDs, low to medium risk unit trusts, or high-risk stocks? Or should you rather go for property or gold?

It’s very important you spend ample time and effort in finding the answers to all of these questions before taking the plunge. Do not act on impulse, assumptions, preconceived notions or just because you’ve received some investment advice.

Read investment-related books and blogs, consult with experts and try to identify the dualities, the nuances, nitty-gritty and worthiness of returns before you take a final investment call.

Related: 5 Good Reasons Why Millennials Should Invest in Unit Trusts

Make informed investment decisions based on your financial goals

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Your investment decisions should bode well with your financial plans and suit your interests. And most importantly, the decisions should never be impulsive, but only informed ones.

You’ll be well-advised to diversify your investments into multiple tools to offset combined risk and maximise the returns. If you’re planning to invest in stocks, strategies like dollar-cost-averaging (investing a small, consistent amount in stocks on a regular basis despite price fluctuations ) and setting reasoned stop-loss and take-profit points (pre-defined orders put in place to close a trade when stock prices either plummet to stop-loss point or peak to take profit point) will be very helpful in safeguarding your investments.

Equally important is the need to compare different options of your chosen investment tool before you select one (click here to check out some of the top FD options).

As such, you need to have complete clarity on your financial present and future to find out how investment-ready are you. You cannot afford to be callous, as it’s your’s and your family’s interests which are at stake here. So next time you just “feel like investing” or receive any advice, you know the drill before taking the call.

Here’s to a safe and rewarding investment journey. All the best!

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