How do you start investing?
POSTED ON January 08, 2020
So you’ve heard enough about investing to know that you want to do it, but just how do you begin? We’ve outlined the basic steps below, so you have an idea of how to get it done.
Step 1 - Pay your debts
Debts accrue interest. The longer you put off paying them completely, the more you will have spent in the end. Before things get out of hand, get rid of those debts, ASAP.
Never hold off paying your debts in order to start investing, and don’t borrow money in order to invest. Being debt-free is the proper condition to be in before you begin your investment journey. (See also: Two strategies to clear debt).
However, this shouldn’t include good debt (loans made to generate income or increase your net worth instead of those simply for paying for something expensive). Just make sure to budget properly for these, so you can keep up with the monthly payments while having extra money to invest with.
Step 2 - Create your emergency fund
Investments require time to earn. If you suddenly find yourself in an emergency and you need money quickly, selling your investments to cope might mean that you’ll end up with a loss.
An emergency fund will make sure you have enough money to immediately cover these unexpected expenses while you look for a more permanent solution. (See also: Why having an emergency fund is so important).
Step 3 - Set your goal
What are you investing for? Is it something you aim to achieve soon or are you planning for years down the road?
The answers to these questions will help you figure out the right amount to aim for, as well as let you know how long you are willing to wait in order to earn that figure.
Step 4 - Assess your risk profile
Take a risk assessment test to find out what level of risk you will be comfortable with. It will help narrow down the range of investment products that match your personality and needs.
Some products are more suitable for people with a higher risk appetite, for example, while more conservative investors may be better suited by a different set of products.
You can take the risk profiling test at any bank with an investment facility, or via investment apps. (See also: What is a risk profile and why should you care).
Step 5 - Check your options and choose
Look at all the investment products that match your goals and risk profile. Depending on your risk profile, you may find that you have a range of options, so check out the characteristics of each type to help you decide which one to go for.
Money market instruments, for example, can be a good match for a conservative risk profile. People who have a moderate risk profile could see if bonds fit their needs, while stocks might be right for aggressive investors.
Speaking to an investment specialist is an option, if you need the pros and cons simplified.
Remember that you don’t have to choose just one type. Diversifying your investment portfolio can help minimize the risk that you will encounter in your investment journey.
The waiting game
This is possibly the hardest part of the journey. While you can definitely track your investment’s performance on a regular basis, most types come with a recommended holding period. It is the minimum amount of time you should keep the investment in order to get the best results.
These steps give you a general overview of the entire investing journey, but remember that each step involves some careful consideration. Learn more about them in the different articles on Earnest!