via iMoney Philippines |
The world of investing sounds so promising and so scary all at once. High returns! Quick earnings! But then — the stock market might crash! You might end up losing all your money and have to live in a ditch somewhere! Quite polarizing, isn’t it?
Like many things, investing comes with risks and rewards. But before you look at investment products and start counting your eggs before they hatch, there are a few crucial steps you should take. You’ll need to assess your current financial situation to make the best investment plan. Here’s how to make sure you’ll start off on the right foot before even making a single investment:
1. Find out your net worth.
Before you start investing, you should evaluate your own financial health first. One way to do that is by knowing your net worth, which is essentially assets minus liabilities. (For more in-depth information about calculating your net worth, consult our guide.)
Knowing your net worth will go a long way towards planning your investment strategy, because this is how you find out how much money you’ll have that you can actually invest. Do you have a positive net worth? Then move on to step 2.
If your net worth is negative, perhaps now is not the time to start investing in risky assets. You can try more secure investment options or instead, try to increase your net worth byfollowing these tips.
2. Calculate your cash flow.
To start investing, your monthly income has to exceed your expenses by a healthy margin. Calculate your cash flow by tallying up all your monthly expenses and subtracting it from your monthly net income. Do you have a lot of extra money left over? Great! Then you can move on to the next step.
If you’re earning P30,000 a month but spending P29,000 of it, it might be too early for you to start investing. But you can free up money for investing by reducing your expenses. Investing should be a priority for you, go over your budget and find out ways you can shave off money from your expenses and redirect it to investments. After all, it only takes P10,000 to start — if you tweak your budget enough, you may be able to get this amount and get investing right away.
Looking to cut down on your expenses to free up money for investing? We listed 37 ways you can save money right now.
3. Pay off high-interest credit card debts ASAP.
Investing in a product that gives you 10% returns annually sounds all right, but when you do that while paying off 3.5% or higher interest rates per month in credit card or other bad debt, you’re not getting ahead financially.
Let’s say you invest P20,000 and manage to get 10% returns after a year — you make P2,000. But let’s say you also owe P20,000 in credit card debt, at 3.5% interest per month, and you only pay P2,000 of your bill per month. By the end of the year, you’ll have paid P3,995.47 in credit card interest.
When you combine your investment returns with your credit card interest payments, you’ll actually lose P1995.47 this year, instead of enjoying positive returns on your investment!
Instead of investing while you still owe debts, use that P20,000 to pay off the debts first. Because when you’re debt-free, you can focus on investing in good products that will get you high returns instead of losing your money in interest payments. And you’re generally more able to take risks with your finances since you don’t risk landing yourself into an even bigger ditch.
If you need some help in paying off your credit card debt, read up on these smart debt payoff strategies.
4. Have an emergency fund.
Putting all your eggs in one basket (in this case — your money in investments) might make it hard to liquidate in case of an emergency, which can then force you to go into debt to cover your costs on time. Having an easily accessible emergency fund will prevent this from happening.
Before diving headfirst into the world of investing, make sure that you’ve shored up your base by building up an emergency fund. After all, nothing will help you sleep better at night than knowing you’ve got money in the bank.
Basically, before you do anything else with your money, you should make sure you have an emergency fund of at least 6 months income stashed away.
5. Set your timetable and investment goals.
Before you pick an investment product, you should know what your investment goals are. Generally, for the long term, invest aggressively; for the short term, invest conservatively.
So let’s say you’re saving up for an expensive vacation you want to take in the next one to three years, or perhaps a down payment for a car. This would be a short-term investment, and you should look at conservative products that have a low minimum investment and with short or no holding periods so you can redeem your money at your convenience with no penalties. A money market fund is a good example.
But what if you’re investing for something mid- to long-term, like your children’s college education? Then you should focus on growing your money, taking a little more risk for more returns. Since you have time on your side, you can let the power of compound interest grow your money faster. If you invest P10,000 initially in a product that earns 8% annual interest and P1,000 a month afterwards for 16 years, you’ll have almost P400,000 by the time he starts college. For this goal, you should look products like balanced funds that fall nicely between conservative and aggressive risk appetites.
For long-term goals like retirement, it’s best to invest aggressively and early. If you’re still a long way from retirement and time is on your side, it makes sense to invest in equity-based investments that have high risk but also high reward potential. Even if the value fluctuates, your portfolio has plenty of time to recover before you need to liquidate it because you don’t need it right away anyway.
Keep in mind that these are just general guidelines. If you want to learn more, consult your bank’s investment advisors so they can help you pick the products that are right for your goals and risk appetite.
Investing is an important step in your financial security. And when you take proper steps before you even start investing, you’ll put your best foot forward and ensure a healthy financial future for yourself. So are you ready to invest?