Can I afford to invest?
If you’re thinking about dipping a toe in the investment waters for the first time, the question of affordability has most likely come up. The good news is, investing is entirely possible even on a modest income. In fact, common sense is more important than infinite disposable income.
A sound financial foundation is key, but an appreciation for risk and setting objectives that will help you stay focused and make smart, long-term decisions, can be just as important. Here are five questions to help you work out whether you’re ready to get started.
1. Are my finances in good shape?
Creating a financial situation that allows you to invest comfortably is essential. That means boxing off the fundamentals, like saving regularly and having enough money to cover everyday spends, holidays, car maintenance and more expensive times of the year, like Christmas.
An ‘emergency fund’ is another financial fall back Irish households have become more familiar with. This is different for everyone, but the idea is to have a pot of money that can be relied upon to cover typical living expenses should your financial situation take a backwards step, or you find yourself with a large, unexpected expense.
2. Do I have bad debt?
Clearing bad debt is an important step on the path to financial freedom. So, what’s the difference between good and bad debt?
Good debt might be the mortgage on your home, finance on a family car or college fees for you or your children. They’re financial investments that generally come with longer-term payment plans and lower interest rates.
Bad debt includes things like high-interest credit cards or personal loans. Financial commitments with income-guzzling charges that will slow down your investment plans at best and freeze them altogether, if they’re allowed to drag on.
3. Do I understand my appetite for risk?
Matching your financial ambitions to your risk appetite can be an education in itself. Everyone loves the idea of high returns, but not everyone has the stomach for high risk, which is why many investors fall somewhere in-between, with more moderate risks accepted in the hope of moderate gains.
The beauty of investing is that your plan can be tailored specifically for you and the investment style you’re most comfortable with.
Multi asset fund portfolios are a smart way of achieving diversification in one, well-balanced plan. Good risk management is about finding a combination of funds that allows you to grow your money and sleep at night.
4. Have I protected those who need it most?
If you have a partner, children or a mortgage, it’s important to think about investing in your own life and health first, to help ensure your dependents will be protected, should anything happen to you.
A straightforward life insurance policy with a clear term that lasts for the duration of your children’s adolescence and education, will give you peace of mind and provide a financial cushion for your partner or family, if you’re not around to support them.
A pension and a Will make good financial sense too, so anything you leave behind can be managed with your wishes in mind, down the track.
5. Do I have a trusted financial adviser?
If you’re considering investing, chances are you’ve thought about some of these things already. If not, we recommend talking to a financial advisor to help create a plan that reflects your goals and financial priorities.