A Beginner's 4 Step Checklist Before Starting Your First Investment (2022)
Now that 2020 is in the rearview mirror.
Perhaps one of your goals for 2021 is to earn more money to meet your personal life goals.
One way to do so is to start investing, a proven and effective way to put your money work and build wealth.
When done well, investing can potentially help your money grow to outpace inflation and build your wealth.
This is achieved mainly through the greater growth potential of investing which can be attributed to the power of compounding and the risk-return tradeoff.
I think we all know that investing can be very beneficial.
But, you might still be wary about it for whatever reason.
Let’s get some of these common concerns out of the way:
- It is too complicated (I didn’t study investing or finance in school)
- I don’t know how to ‘Trade or buy stocks’ too technical
- I don’t want to lose any money because it is too risky
- It is too far away and only for my later phase in life when I am planning for retirement age
To address these concerns and help you get started with investing, we have designed this simple four-step checklist after tapping the wisdom of the Seedly community members who have got past this hurdle.
Here we go!
TL;DR: What You Need to Do Before You Start Investing in 2021
However, here is a simple 4 step checklist which we believe all who are getting started should follow:
- Have NO or manageable debt
- Have rainy day funds (6 months of monthly committed expenses)
- Understand basics in investing (and discover various asset classes)
- Willing to grow your investment for the long term (5 to 10 years)
Here’s the full podcast if you’re interested.
Q1: Do You Currently Have NO or Manageable debt?
This is a very important question to answer.
Simply if you are in debt, you are fighting a losing battle where you are paying off a loan at an interest rate which may be rendered redundant if you are trying to invest also.
Here is a simple illustration:
You are in a student loan debt of $15,000 with a guaranteed interest of about 5% per annum (p.a.).
Instead of trying to allocate more funds to pay off the debt, you are trying to invest that additional funds into an exchange-traded fund (ETF) that yields a non-guaranteed 5% p.a.
There are two main problems with this.
Firstly, you need to know that your investment returns are not guaranteed while the interest on your student loan is guaranteed to keep accumulating.
Volatility in the stock market means that your investment might crash like what happened with Black Monday 2020 in March.
Also, even if your investment does well and yields about 5% p.a.; your net investment gain will still be about 0%…
Thus, you are effectively wasting the costs incurred from investing (brokerage fees etc.) to go back to square one.
Instead, you should fight the negative yield (in this case, clearing your loan first).
This is actually a pretty common situation we observe with individuals with student loans. My answer would be to focus on clearing that down first before moving to the next step of building up your savings reserve.
Another big red flag is credit card debt. Never get into such deep waters, because these debts generally have an interest rate of about 26% p.a which can get you neck-deep in financial trouble real quick.
Thus, you should prioritise clearing your credit card debt or other high-interest debt if you have it.
Here are two tried and tested ways to clear debt:
However, there are exceptions to the rule with manageable debt.
Even though the interest on these debts is guaranteed, the interest rate on these debts is generally lower.
For example, you have your housing and mortgage loans where you can actually predict the interest rate (eg 1.0% to 2.6%) or using your CPF every month.
Granted this method is still risky as investment returns are not guaranteed.
But, you can actually look to build wealth at a yield above that interest rate.
Q2: Do You Have Your Rainy Day (Emergency Funds)?
As a rule of thumb, you need at least six months of monthly committed expenses locked down for emergency purposes.
Often, people assume that investing is for the short term.
Research has proven that if you are in it for the quick-gains, it is likely you will falter and fall short. The long-term passive investors likely are the ones who will ride out the volatility during bull and bear markets.
Hence, it would be essential to have at least 6 months of monthly expenses.
This is critical as you do not want to be forced into selling your investments when you need money in the event of a bear market.
This will actually set you back and put you in a worse off financial position.
An example of monthly committed expenses would include things like insurance premiums, food, water, utilities and rent. Basically, things which rank very critically on the Maslow’s hierarchy of needs. (Safety and Physiological)
Q3: Do You Understand The Basics To Investing And Asset Classes?
We believe in the saying that knowledge is power, and to take calculated risks. Investing is no different.
It is very crucial to not follow the herd-mentality in investing.
Often the big losers are the one who follows a friend’s recommendation or stock tip but ends up getting burnt. (personal experience here from my earlier days in NS)
What is important is to consider is your risk appetite and why are you actually investing for. Is it for long-term retirement, to beat inflation etc?
Here is a beginner-friendly infographic and accompanying article that will give you a basic understanding of these asset classes:
How Much Investible Funds Are Enough?
We advocate setting aside a comfortable amount (anywhere between 15 to 30% if you need a hard number to gauge) of your monthly income for passive investing.
In that same idea, it is likened to the concept of paying yourself first and having a job for every dollar. Only set aside investing funds which you do not need for the short term.
What Strategy Is Recommended for Beginner Investors?
Most investors would have heard of this famous phrase:
“Time in the market is better than timing the market”
Therefore, a common strategy which most adopts is the idea of Dollar-Cost Averaging.
This strategy refers to the practice of buying a fixed dollar amount of a particular investment product on a regular schedule, regardless of the price.
Here is an infographic that explains this concept:
From the above, it is observed that the investor purchases more shares when prices are low and fewer shares when prices are high.
A common adaption of this simple idea of investing is in the idea of contributing monthly to your investment product.
Q4: Are You Willing To Grow Your Investments For The Long Term?
One of the common reasons that people have to invest is that they want to make a quick buck on their investment return.
However, that mindset can be potentially dangerous because you may enter and exit the market at the wrong timing.
A better way to think of investing is that you want to grow your money over a period of 5 to 10 years or even more, to beat the core inflation of about 1.9% per year.
You will see that over a period of 30 to 50 years, the performance of this index in general, grow over time as economics are generally still quite resilient.
But, you need to know that this is not guaranteed as past performance is not indicative of future returns.
Bonus Question: Is Investing More Important Than Saving?
It can be very confusing when people talk about savings and investing.
People often mix them up and many financial services companies add to the confusion selling products with both components mixed in together.
Both Savings And Investing Are Important For Different Reasons
It’s like deciding to eat an apple or an orange. There are Pros and Cons of each approach, and both serve different purposes
- Savings is the idea of storing a bulk of cash for rainy days or when opportunities come for you to dive in. It gives you a cushion for unplanned expenses or potentially planning for big expenses such as kids, starting a family etc.
- Investing is the idea of deploying your capital into the market and letting your money work for you. When done correctly you will be able to beat inflation and potentially drive passive income (Returns = Capital gain + Dividend yield)
|Cash funds for unplanned
or planned expenses
|Beat inflation and
grow your passive income
|Beat 2-3% per year
|Freedom of choice
|Can be easy if you do
|Lose out to
|More returns most likely
comes with more risk
will not grow
|Best for long term
|Less liquidity for
urgent uses in short term
with any local bank
|Passive investing tools
|Under your pillow
(in your Safe etc.)
|Exchange Traded Funds
|Blue chip stocks,
Funds, Unit Trusts
Conclusion: Save First, Invest When You Are Ready
You have to understand your current life stage to properly determine if you are ready.
Also, do be very wary of agents and financial planners who try to sell you a mix of savings and investment products if you plan to Do It Yourself!
If you want to check out our answers and many more answers from the other TOP contributors on Seedly, head over to our Seedly platform!.
Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock.