A lot of people I know say, “I want to invest in the stock market, but I don’t know how and where to start”. Well, you are not alone. But before going to invest, here are 5 things you have to consider before you start it.
Emergency Fund
Life is uncertain. Yes, you may have a perfect investment plan. But what if Murphy’s law happened? Unexpected job loss happened, or suddenly you got sick? You can’t just pull out your investments anytime. You may, but the benefit will be gone. Maybe your investment didn’t earn yet, or the value was lower than the original amount.
Setting aside an emergency or a buffer fund will certainly help you in times of need. It will leave your investments untouched in times of difficulties. Start saving money for your emergency fund on your bank account. Typically, 3 to 6 times your monthly expenses is enough. If you want it to earn a little more interest than depositing all of it on your savings account, consider putting the half on a time-deposit account. They earn a bit more than pure savings account. But remember the ultimate purpose of the buffer fund, that is liquidity, or easily convertible to cold cash.
Pay-off Bad (like Credit Card) Debts
Debts. You may consider this word as a bad one. But no! Not all of debts are bad. There are good debts too! Debts that was used to generate passive income is a good debt. Like a debt for your business. Also, mortgage for your hose is considered a good-to-neutral one. But there are also bad ones. This debts do not generate income, or worse, increases rapidly. Credit card debt is an example of a bad debt. Before investing, pay-off your balance first! Your income on your investment will be just cancelled out if you accumulate interest on your credit card.
Investment Goal and Time Frame
What is your objective on why you would like to invest? Is it for your retirement? For educational fund of your child? For future vacations? Determining your investment goal is a big step and a right direction towards investment planning. You know your reason so that you would be motivated to save and invest more. Also, if you know your objective, you would know your time frame. For example, if your purpose is for your retirement, you know that the time frame would be longer. At least 10 yrs of continuous investment is typically the time frame for goals like this. Different investment time frame also entails different investment fund and strategy. But this is another topic, I will also write about this in the future. So, watch out!
Risk Tolerance
Before investing, you should know how risky you are. Are you a conservative type? Or a daring one? The more the risky the type of investment is, the more interest or income it can possibly attain. The less risky it is, the less interest for it. If you are in your 20s or 30s, you can still tolerate more risk than on older people like in their 40s. Equity Funds are the ones who are invested on the stock market. This is more risky than on let’s say Bond Funds, which is an example of a conservative fund.
Life / Health Protection / Insurance
Aside from having an emergency fund, consider having a life / health insurance also. We wouldn’t know what will happen in the future. You wouldn’t know when you will be sick or have a critical illness. Sometimes, emergency funds are not enough to cover the hospital bills. Health Protection / Insurance is a great help to compensate this. If you have already have a health card from your employer, then great! You can also have an additional plan outside of this like Critical Illness benefit from an insurance provider.
In the case of unfortunate death, your loved ones cannot just get your investments. They must pay estate tax! In the Philippines, it ranges from 10%. For example, you have 5 million pesos worth of investments. Your loved ones must first pay 6% of that (which is 300k!) before getting the 5M. Where can they get that amount of money? It you have life insurance, they can use that to pay for the estate tax since tax doesn’t apply on life insurance.
Need a financial advise? Financial plan? Contact me at peter7james@outlook.com to learn more. I am gladly here to help. Let us plan for a brighter future! Invest now, reap later. Happy Investing! 🙂
