It’s easy to get caught up in the excitement of making money and jump straight in. But investing should be based on logic, not emotion, to get the best returns.
The first step is to set well-defined goals: why you want to invest and what you hope to achieve. It may be to create an extra income stream, early retirement or save for a big-ticket item. These goals will determine your investment approach.
Once your goals are clear, these five tips will help you work towards reaching them:
1. Consider your options
What is right for your friend/relative/hairdresser is not necessarily right for you. It’s important to consider all the options available and which ones best suit your goals.
There are many types of investments, each with their own benefits and drawbacks, such as:
Property – residential or commercial
Managed Funds/Listed/private investment trusts
Collectables – e.g. wine, art
Precious metals – gold, silver, palladium
Home improvements – increasing the equity in your home if you own it.
Think about your risk appetite (that is, how much risk you’re comfortable with) and your life stage, as these can help you decide where to invest your cash.
For example, you can generally take on more risk when you’re young, as you have less to lose and more working years to make up for any losses.
2. Get sound advice
Getting tailored advice from a qualified, licensed, practicing financial adviser is a sound investment in its own right.
Understanding what you’re doing when investing money is crucial. But finances are complex and you don’t know what you don’t know.
There are numerous factors to consider, including:
Taxes: assets are taxed differently and may attract stamp duty, Capital Gains Tax (CGT) or other taxes.
Costs: both to buy and ongoing maintenance/legal/accounting expenses.
Legislation: rules vary enormously and change over time.
Government incentives: e.g. super co-contributions, tax rebates.
Protecting your investments: risk mitigations strategies, relevant insurances, contingency plans.
Superannuation: Which fund? Is a Self-Managed Super Fund (SMSF) suitable?
Getting these right from the outset can save you thousands (or more) in unnecessary tax and lost earnings.
3. Only invest what you can afford
Chances are you’ve heard this expression before, and for good reason.
Go through your budget and work out how much you can realistically afford to invest. Factor in all work and household expenses and some fun money too.
If all goes to plan, your investments will increase in value over time. But they shouldn’t affect your ability to feed your family should they go bust.
Take a look at your debts too. You may be better off investing surplus cash in paying down your debt – credit cards, loans, and tax debts. There’s zero risk of losing money this way, plus you’ll be in a better financial position to invest in the future.
4. Determine your exit strategy
Your goals will determine when and how you want to access the proceeds of your investments. This is something many new investors overlook.
Shares can be sold with the click of a button, but property can take weeks or months to sell. Selling out of a business depends on whether a buyer can be found. Superannuation generally can’t be touched until you retire.
Make a plan for when you want to sell each investment and how you will go about it. Bear in mind there are selling costs, which can wipe out your profit if you weren’t expecting them.
5. Invest in an emergency fund
As COVID has shown us, unexpected things can and do happen – your income could disappear, business be unable to trade, or investments become effectively worthless. If some unforeseen event or health crisis hits, how will you keep a roof over your head?
Don’t start until you have set up your emergency fund. Whilst three months used to feel reasonable, COVID has shown us that many need at least six months’ income set aside.
You’ll be thankful if you ever need to rely on it. And if you never do, great! You’ve got extra money set aside for your twilight years or when the time is right, to invest.
An emergency cash stash really is the wisest investment you’ll ever make because no one wants to be forced to sell anything.
Helen Baker is a licenced Australian financial adviser and author of two books: On Your Own Two Feet – Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce – Your Survive and Thrive Financial Guide.
Note this is general advice only and you should seek advice specific to your circumstances.