1. Have a budget
Budgets, the word we hate hearing! But a budget is an essential tool when it comes to successful investing. As I have earlier stated in most of my posts, investing is all about consistency. It should be a lifestyle not an event. It’s not about waiting for that day you will come across a huge sum of money for you to invest but being able to consistently set aside an amount to invest no matter how little it is. And that’s just what a budget will offer you.
A budget will help you to arrive at the amount you can comfortably invest having taken into account your must need expenses. This is important as it will ensure consistency and discipline in your investment journey. And the sooner you instill the good saving and investing habit, the sooner you will achieve both your short-term and long-term financial goals.
So, take time and create a realistic budget and come up with an amount that you can consistently invest on a monthly basis.
2. Have an Emergency Fund
Having an emergency fund is one of the most important things you can do for yourself. Emergencies happen on a daily basis and unless one has a proper emergency fund in place, starting to invest for long-term goals may be futile. As the name suggests, emergencies often come unannounced and need immediate action hence you will always need money to tide over the situation. An emergency fund is that pool of money set aside for such unforeseen expenses.
It is important to have an emergency fund as emergencies are bound to happen and in the absence of an emergency fund, you may be forced to borrow money from friends, relatives or take a personal loan and end up paying interest which will eat up into your investments. Moreover, if debt is not an option one may end up breaking their existing investments in a rush which may lead to losses.
Although there’s no fixed rule on how much emergency cash one may need, it is advised to save at least three to six months’ of your monthly expenses as your emergency fund. The amount saved should give you the confidence to combat any financial emergencies that may arise without you breaking your investments. And you don’t need to save it all at once, you can start with one month’s expenses then consistently save the rest over time.
3. Be debt free
This is sometimes controversial as most people have different opinions however, I can never insist it enough, pay off your debt before you start investing. The most common question I get as a financial consultant and I mean everyday question is why payoff my debt while I can earn more money through investments? No you won’t! Nine out of ten times you won’t make more money than the interest on your debt.
Most of the time, the low risk investments that will offer a guarantee return and preservation of your capital will often give you a return way lower than the interest rate on your debt. The investments that can match up or surpass your interest rate are often very risky. And trust me, markets don’t always behave, it will be very devastating to have an interest to pay and losses at the same time.
Take care of the debt first then after that you can start looking at making money through investing. Make a plan to get rid of debt as soon as possible especially if you have un-constructive loans such as mobile loans (fuliza, tala and the like), personal loans, car loans etc. These loans have a very high interest rate that most investments cannot match.
Even when we think our investments match or surpass our debt, the sad part is that, most of us don’t do our math right. We assume if an investment is to give us a 12% return that’s what will get to our accounts. We forget to account for things like taxes, management fees, brokerage fees etc. that may eat into our returns. We also forget there are hidden costs that may accrue in our loans e.g. bank charges, transaction costs etc. At the end of the day we end up earning less returns while our loans cost us more.
So unless it is a long-term loan with a low interest rate that you are very sure your investments can surpass, it is advisable to pay all your debts before investing. Work towards creating wealth for yourself and not for the bank/lender. Remember, as Albert Einstein stated, those who understand how compound interest works will earn it, but those who don’t will pay. Make sure you are on the right side of that equation.