So you’ve made the decision to begin your investing career? Very wise. With a new £20,000 ISA allowance at your disposal (since yesterday), there’s every incentive to get started.
Does this mean you should dive headfirst into the market? Not necessarily.
While it would be a mistake to wait for the ‘perfect’ time to begin, it’s nevertheless important to ensure that you do so from a firm financial footing.
Here, then, are five steps that all budding investors should ensure they’ve taken before buying their first shares.
1: Pay off debt
There’s little point becoming an investor if — mortgage aside — you still owe money. There are two reasons for this.
First, any debt owed on credit cards is likely to be at a far higher interest rate than any return you can expect from the stock market, at least consistently.
Second, the unpredictability of stock markets means that the value of your shares could fall considerably over the short term. Any debts you have, however, can only grow once interest is taken into account. The former will be far easier to deal with without the latter hanging over you.
In both a practical and psychological sense, becoming debt free first puts you firmly in the driving seat when it comes to growing your wealth.
2: Cut down on spending
Having become debt-free, you now need to avoid it like the plague by cutting back on buying stuff you gain little benefit from.
Do you have a subscription to a streaming service that you never use? Cancel it. A gym you can never be bothered to go to? Why not switch to completely free bodyweight exercises or start running?
Eliminate the unnecessary now and your future (wealthy) self will thank you for it.
3: Have an emergency fund
While the actual amount will depend on your circumstances, building an emergency cash fund makes a lot of sense. This way you’ll have a financial buffer in the event of sudden redundancy, a broken boiler, or some other event life decides to throw at you.
Shoot for enough cash to cover roughly 3-6 months of living expenses.
4: Know yourself
Charging headlong into investing before thinking about what you want to achieve is akin to driving without knowing your destination, or the route you’ll take to get there.
As such, you need to set aside some time to think about the reasons for turning to the stock market (e.g. child’s university fees, retirement) and, consequently, your target date for achieving this goal.
Once you know your goals and how long you need to stay invested for, it’s important to be realistic about how much risk you’re prepared to take. This will determine what assets you ultimately buy. Get this right and you’ll avoid a lot of worry further down the line. Click here to find out more.
One last thing.
5: Learn to ignore the hype
Before beginning to invest, it pays to develop a realistic mindset about what returns you can expect. Understand that unless you’re incredibly fortunate or skilled, you’re very unlikely to build a sizeable nest egg in a short period of time. Warren Buffett didn’t become an instant billionaire and neither will you. Put your faith in the power of compounding (interest on interest) rather than any get-rich-quick scheme.
