Knowing how much you have available and what your debts are is the first step. You can work through my Finance 4 U Series which goes into the foundational steps to KNOW your numbers in detail.
The series goes through some key elements to help you feel more confident with your finances and consciously be aware of where your money comes from, where it goes, and how to manage that process.
Investing is different to saving. Invested money is not as easily available as money held in saving accounts, however, some investments are accessible within a few days if needed. My intention with this post is for investing for the long term, so there are some steps you need to consider BEFORE you start moving money to investments.
Ideas to get started with investing
Checklist BEFORE investing
Consider Emergencies for a Rainy day
Be prepared for emergencies like appliances or car breakdowns, medical emergencies or family needs. An estimate of 3-6 months worth of expenses should be readily available. Either in an online saving account or if you have a mortgage, it could be in your ‘offset account’.
Our situation: Our barebones monthly expenses are $5,000 so in our situation, we should have $15-30k. At the time of writing this post, we have $16k between our online savings and offset account. Now this is a bit low for my liking however I do take into account that I have income protection (kicks in at 3 months) and we could defer some expenses for the short term if we needed to (or sell some shares). If we had a lot of annual leave or long service leave up our sleeve I wouldn’t worry as much (but we don’t have any as I only started last year with my new job and hubby is without a job at the moment). Our Monthly expenses which look after ALL our expenses is $6,600 per month ($8,000 if we include a Travel Fund). In order to feel really comfortable with our ‘security blanket’ emergency fund, we should be holding $19,800, let’s say $20,000 in our savings account BEFORE investing.
As expenses play a huge role in how you determine this amount, it’s important to always Review, Reduce, Remove as much of your expenses as possible. Check out this post for ways to do this. If you can reduce your monthly expenses number, then your Emergency fund can be lower.
What would be your emergency fund amount?
Debts
What debts do you have? If you have high-interest consumer debts, these really should go first.
Car loans which are less than 5% interest rate AND where you have paid off more than 50% of the value of the item are possibly OK. You could get started on investing.
Our situation: We have no car or credit card debt, however do have an investment property. The rent and tax refunds pay for the repayments and we are at 50% on the loan. We have stable tenants and are in a high demand area so don’t feel this is a risk to deter us from investing.
Home Loan (PPoR = Principle Place of Residence)
How much do you owe on your PPoR vs the conservative value of your home? Vince Scully from Life Sherpa has a formula for this that I like. Once your home loan is down to 50% of the value of your PPoR, then you can work on paying the minimum repayments so that you can simultaneously invest. NOW not everyone likes this idea and it is certainly not for everyone. You can read my post discussing Vince’s book The Latte Fallacy, which delves into this, with a great diagram too!
Our situation: The value of our PPoR is approx. $1.4m with a loan of $480k. The calculation of $490,000/$1,400,000 = 34%, therefore we are under the 50% sanity check. We are comfortable with this loan slowly being reduced ($1,000 per month off the principle) so will only pay the minimum repayments that the bank suggests. Also, need to consider that interest rates are extremely low. Our interest is approx. $12,000 per year.
Your thoughts around money and how comfortable you are with investing is really important, however, if we just look at the emotions we may never get started, so I would suggest reviewing the facts of your own situation and if you have a solid backing behind you, then you can start small and move into investing, get your toes wet so to speak.
WHERE and WHAT to invest
I am mainly suggesting shares of some sort here. Investing in property takes a lot more research and a heavier outlay. I am all for investing in property and as you may know from my journey, we have invested in property. To be honest the only reason we went down the property path is we knew others who did it and it ‘felt’ safer. Touch and feel kind of thing.
Looking back, I do see that the ONLY reason I did not participate in shares is that I was scared of them. Too many times I would hear that people could lose half their assets overnight. It freaked me out and up until I did my own research, read blogs, listened to YouTube clips and spoke to professionals, did I start to understand that there are so many ways to invest in shares. You have day traders that are kind of ‘playing the stock market’ with buying and selling every other day. And you have people buying shares and never selling them. Like a set and forget with any returns automatically being reinvested in the same shares (dividend reinvesting). And then there were people buying regularly, regardless of fluctuations, and growing their investment.
There are different types of shares to consider, individual company shares, exchange-traded funds (ETFs), Listed Investment Companies (LIC) and Bonds …… it can be overwhelming and with the lack of education (we don’t get it from the average parent, definitely not school, and not from friends around the BBQ or the pub) most people tend not to invest in the stock market. For an interesting read, check out this recent article on the ASX blog, lots of graphs for those number lovers too!
HOW to invest
PAY YOURSELF FIRST …. 10% is ideal. Start small … with ANYTHING … but invest in yourself first!
An idea that I heard from a Money Over 50 Podcast Episode was to handle the amount you are SAVING/INVESTING as an expense or a bill you need to pay. That way you expense it out of your account like a phone or electricity bill. Depending on your age, sometimes this investing/bill could be into your retirement fund which could then give you a tax refund that you can reinvest OR use for your travelling budget for example.
Other Resources (for those who want MORE!)
Some great books to read on this post:
- Richest Man in Babylon
- Latte Fallacy
- Simple Path to Wealth
The great thing about all this is that you can start small, do some research and immerse yourself slowly.
