Decided it is time to start your investment journey? Putting a chunk of your hard-earned cash into an investment can be a daunting prospect for a first timer. Here’s some help with the first few steps.
First steps – get control of your finances
Where do I start?
That’s easy. Budget.
Understand what you can afford to invest. Eliminate the guesswork and understand your cash flow. That means getting on top of your income and expenses and having some surplus left over for savings and investments. If you need a hand with this check out the Barefoot Investor, the book simply and clearly lays out how to maximise your wage.
Next, tackle consumer debt. Car loans, credit and store cards often have high rates of interest so paying them down makes sense. Paying down consumer debt may give you an effective tax-free return of 15%. Let that sink in. For those undisciplined among you, it might also be time to get out the scissors and cut up those credit cards.
Next. Beat the lazy tax. Simply picking up the phone can save you a motza to kick off your investment journey. Ring around telephone providers, electricity companies, your insurer and your bank to see if you can get a better deal on your mortgage. Spending a few hours on the phone on a Saturday morning can probably save you a couple of hundred dollars over the year.
Step it up – Think right. Feel right.
When you think of investing, psychology isn’t exactly the first word that comes to mind. But it is a crucial factor in your development as a successful investor. Your decision making is unconsciously affected by your biases or beliefs and you need to ensure that your investing decisions are rational rather than emotional. Get in the right mindset to invest.
You also need to understand your risk/reward profile. That’s right – the higher the risk, the higher the reward. Everyone’s risk tolerance is different so it is important that you assess your own financial situation to see what level of risk you are comfortable with.
You can normally tell how far you have stretched beyond your risk profile by how well you sleep at night.
Remember – the risk of loss is part of every investment and remember that capital preservation is just as important as capital return.
Now we’re getting serious. Set some goals. What do you want out of your investments? Growth? Income? Setting clear and defined goals and sticking to them by being accountable to someone helps to keep you focused. I
Schedule dates to check in with the progress of your goals and don’t forget to celebrate the little wins along the way.
It’s about the long term. No one I have yet met has ever got rich quick. Building wealth is about consistently applying great financial habits over the long term. It is about discipline, sticking to the plan, making regular contributions to your investments and exercising patience.
Whether you are investing in property or shares or managed funds, managing your time horizons or looking at protecting your assets, taking a long term approach is a must.
And the simple reason is this – let compounding work its magic. When it comes to building wealth, time is your friend simply because of the effect of compounding. It is that snowball effect of your money making money on the returns you made months and years ago.
When it comes to building wealth, it doesn’t matter who much money you start with, when the compounding starts snowballing you’re really going to be in the money.
Starting out on your investment journey requires discipline, a good understanding of your financial situation and the ability to set clear goals. Creating this strong foundation will set you on the road to becoming a successful investor.