With all the talk on investing, pensions, ISAs and other financial jargon, do you ever have the feeling that you are falling behind the money department? Have the fear-mongers given you a vision of a future you with not enough money to retire on?
Do you have nightmares about being a ‘bag lady’ or begging on the street? You are not alone!
After reaching my last nerve with all this confusing money talk, I became an avid reader, podcast listener and following of anything termed ‘financial education’. I discovered by answering the following key questions I was able to get clear, comfortable and confident enough that I am happy to say I have now taken action, and am an investor!
Why do you want to invest?
– Do you want to build up assets for retirement?
– Save for a deposit on a house
– Go on that holiday of a lifetime?
– Build up a college fund for the kids?
It is important to be clear on what the purpose is because this is a big driver of what to invest in. Choosing to invest because everybody else is doing it and you do not want to get left behind, is certainly a driver but is it going to be gripping enough to get you to stick with this for the long term?
How long will you be investing for?
Knowing your why is the first question as this also helps to know your time frame for investing. If you are going to need the money in the next one to two years, a savings account may be the best option.
A fixed term deposit, where you cannot access your cash for a set period, works between two to five years. Longer term plans lend themselves to investing in the stock market as it gives your investments time to ride out the inevitable ups and downs in the market, as well as benefiting from the magical power of compounding.
How much do you have available to invest each month?
The old saying ‘spend what is left after you save’ is a great slogan, however there is no point in saving if you are going to have to get into debt to live!
Make a conscious spending plan taking into account what you need to spend in order to take care of necessities and pay your debt payments.
Recheck the necessities – this is an area that I found particularly challenging when it came to differentiating my needs from my wants!
What is your risk tolerance?
– The thrill of the rollercoaster ride gets your adrenaline flowing?
– Or are you more the two feet on the ground kind of girl?
Market ups and downs go hand in hand with investing and not knowing your risk tolerance could mean you might lose your nerve and pull your investments out in panic at the wrong time.
Clear self-awareness around what level of risk sits comfortably means that you can choose your investments according to what risk you know you can tolerate and set yourself up for investing success.
The stage you are in life and the ability you have to rebuild your financial losses on your investments are key factors to consider, before an investment decision.
The bottom line – your investments should not give you sleepless nights.
Are you maximising your money?
– Would you reject an offer of free money?
– Who is offering free money? You ask.
The government is!
The government wants to incentivise you to save for your retirement and offers you vehicles such as workplace pensions, personal pensions or ISAs to get these tax saving benefits. Your most savvy investment is to take advantage of them! Don’t look a gift horse in the mouth – not much in life comes for free.
What other investments do you have?
You are probably very familiar with the investment adage – “don’t put your eggs into one basket”. It is important that your investments are spread over various asset classes that respond differently to negative movements in the markets, the economy or interest rate changes.
“Diversity. In stocks and bonds, as in much else, there is safety in numbers” – Sir John Templeton
Think about all the assets you hold and plan your investments to get a good balance between asset classes.
How much can you invest each month?
You want your money to work for you. Many of us haven’t been leading our money to do so and as a result it has been running around a bit loosely. Track your money down by analysing your monthly spending for at least three months. Get clear on the percentage you are spending on necessities and analyse the remainder to identify directions you do not want to go in. Ideally you want to aim to invest at least 20% of your income a month in retirement savings and other investments.
If you do not have 20% available to invest right away, do not let that stop you from taking action. Small consistent investing will get you started on building your investment portfolio.
Have you made consistent investing as simple as possible?
A key to get started investing is using the KISS strategy. Keep It Simple Straightforward!
With literally thousands of managed and passive funds to invest in, not to mention individual shares and bonds – where is a girl to start investing! The short answer is to select the cheapest, simplest and most straight forward option as a starting point! An index linked fund neatly meets this definition.
Warren Buffett, arguably the most successful investor of all time, has been quoted – “by periodically investing in an index fund the know-nothing investors can actually out perform most investment professionals!”
An index fund invests in all the assets, making up its selected benchmark index e.g. an Index Fund tracking the FTSE 100, an index of the UK’s top 100 companies, will invest in a percentage of each of the 100 companies to match the underlying Index. This is a passive investment fund with no manager involvement and thus minimal costs, which typically means higher returns.
The beauty of investing in Index Funds is that a small manageable investment can be made each month and simplified by setting up an automatic debit order to do this! Simple and straightforward.
The real trick to success in investing is to get started as soon as possible. By answering these questions, you will empower yourself to take the first step into investing!