In this video series I am going to give you an introduction into investing. In the first video I covered why you should consider investing. But while investing can be a great way to grow your wealth and achieve your financial goals, before you even start there are a few things you should consider. In this video, we'll cover some important factors to keep in mind before you start investing.
This video is going to focus on answering the question
Things to think about before you start investing...
The first thing you need to consider is your financial situation. Take a look at your income and expenses and make sure you have enough money to cover your bills and emergencies before you start investing. Do you have an emergency fund? An emergency fund is a pot of money that you set aside, separate from any savings you may have, that you can access should you suffer financial hardship. An emergency fund can save you from getting into debt and it is sensible to have this in place before you start to invest. A good starting point for an emergency fund is to have 3 to 6 months net income (so enough to cover your monthly bills).
What about debts? Have you got any short-term debt? Short-term debt, such as credit cards and overdrafts, incur high rates of interest and the interest you are being charged is likely to outweigh any gains you make from investing. It is best to pay off any short term debt before starting to invest making sure to not miss any repayments as this could damage your credit score.
Next you need to understand investment goals and timeframes. Setting an investment goal will help you to understand exactly how much money you will need and by when. Having a clear idea of what you want to achieve will help guide your decisions and give you a greater chance of building wealth over the long term. As a general rule of thumb, you should only invest your money if you do not need access to it for at least five years.
You also need to consider whether investing is right for you? Are you comfortable with losing some or even all of your money? It is important to understand the risks involved when investing and also your own attitude toward risk. These are topics I will cover in the next video in this series.
Finally it is important to consider whether you want to run your investments yourself, but not only that but do you have the time and experience to do so. Alternatively it is possible to have someone advise you on and/or manage your investments for you. Of course there is an associated cost. So if your finances are in order, you have money set aside for financial emergencies and you have spare money you can put away for at least five years then you could be ready to start investing.
In the next video I will look at risk returns and taxation.
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