You may have learnt of several new investment products from a weekend workshop and you cannot wait to start investing. This is like learning a whole new language; you are unsure of how to get started in this whole “investing thing”. You are excited yet you feel a tinge of hesitance to begin. If anything at all, you definitely do not want to make any mistakes because this involves your hard earned money!

So in today’s article, I will share on 4 things to do before you invest.  It’s going to be an exciting journey ahead; so treat this article as the preparation process on the night before the journey, all the packing and map-checking in anticipation for what lies ahead.

 

4 Things To Do Before You Invest

1) Build up 3 – 6 months of Emergency Fund

 

Credit: www.thesimplesum.com 

Firstly before you even begin investing, you should save up at least 3 – 6 months of emergency fund. This is crucial in case if any unforeseen circumstances occurs, you would have an emergency fund as back up. Some unforeseen circumstances includes expensive car repairs, house repairs, illness, random holidays and excessive entertainment.

With an emergency fund built up, you can use it to meet any unforeseen financial obligations. This will allow your investments to be left untouched and kept for the long term to meet your investing goals. The worst case scenario would be when you do not have sufficient emergency built up and you would have to force sell your investments at a loss to settle your financial obligations – avoid it at all cost!

So, how much do you exactly need to save? This will depend on your monthly expenses. For instance, if your monthly expenses totals to RM1,000, then your emergency fund should be:

3 months: RM1,000 x 3 = RM3,000

6 months: RM1,000 x 6 = RM6,000

I would recommend you to place your emergency fund into fixed deposits as it will provide you the flexibility to withdraw out anytime you need it and in the meantime, it will earn you interest income. You may consider putting it into several receipts of RM1,000 per receipt so that you will only withdraw the FD receipts you require and leave the remaining untouched.

 

2) Clear off Expensive Debt

Credit: www.nca.co.za

It would not be beneficial to you if you are earning 10% returns from your investments but you have an outstanding credit card debt which charges 15% p.a. If that’s you, you are essentially borrowing money through your credit card at the cost of 15% p.a. and getting only a return of 10% p.a., that’s loss making!

It doesn’t help that in a recent news published by FMT News that reported that approximately 47% of Malaysian youths have high credit card debts. That’s almost every 1 in 2 youths being tangled in credit card debt!

Furthermore, the report also states that approximately 38% of Malaysian youths have taken up personal loans. With such statistics, surely the youths will need to figure out a way to get out of debt. If that’s you, don’t worry because they say where there’s a will, there’s a way.

So here’s what you need to do; first list down all your debts outstanding and the interest rates for each loan. It may look like the below table:

 

No	Loan	Outstanding	Interest Rate (p.a.)
1	Credit Card	RM8,000	15%
2	Personal Loan	RM2,000	5%
3	Housing Loan	RM200,000	4.2%
4	Student Loan (PTPTN)	RM10,000	1%

Next, there are 2 ways you would want to tackle your debt:

 

1. Pay off your most expensive debt first.

This the most logical way to start clearing your debt; by settling the most expensive ones first. In the example above, that would mean settling the credit card debt first which charges 15% p.a. and followed by the personal loan. For more pointers on settling your debt, you may refer to this useful article by iMoney .

 

2. Pay off the smallest outstanding balance first (snowball method)

Famous financial guru, Dave Ramsey, recommends the snowball method when tackling debt. This method looks at settling off your smallest outstanding debt first regardless of the interest rate. The reasoning is that settling your smaller debts is more achievable as a first step and provides a snowball momentum.

Once the small debt is settled, you are psychologically stronger to push on to bigger debts. You may refer to Dave Ramsey’s explanation on the snowball method on this link .

With that being said, my personal take is to pay off only the expensive debt before you start investing. There are some debts which are good debts, for instance your housing loan and the student loan (PTPTN), due to its relatively cheap interest rates.

For these good debts, I personally think it is fine to maintain them while you begin on your investing journey. Perhaps over the short to medium term, you may gradually pay down these loans because there’s nothing that feels better than being free from financial debt.

 

3) Identify your Risk Profile

Before you invest in anything, you have to identify your risk profile. By knowing your risk appetite in investing, you will then know what investment products to invest in. This is akin to being a runner and choosing your race. If you’re a sprinter, you would go for the 100M dash instead of the 42KM marathon. You choose what best suits you.

I have tried doing a quick search on Google and this Risk Profile Questionnaire by FundSuperMart seems to be the most user-friendly. Although the currency is in SGD, you really don’t have to be bothered by it. Just treat it as though it is your local currency.

Generally there are 3 broad categories of investors:

 

a) The Conservative Investor

The conservative investor prefers a stable investment with minimal volatility. They prefer investments that gives a steady income stream and average capital growth. Some investment products that will suit the conservative investor are Fixed Deposits, Money Market unit trust, bonds and bonds unit trust.

 

b) The Balanced Investor

The balanced investor is ready to take on some volatility but would balance it with some stable investments to suit its medium-risk needs. The balanced investor would have some conservative investment products coupled with equity unit trust, REITs, real estate and shares.  

 

c) The Aggressive Investor

The aggressive investor does not mind exposing their portfolio to great risk and high volatility because the high risk increases their chances of gaining high returns. Majority of their investments are in shares, forex, and equity unit trust. 

 

Knowing your risk profile is important for you to ascertain the investments you are most comfortable in. If you’re a conservative investor, you do not want to invest majority of your funds in high risk products. You will not get good sleep every night worrying about your investments. Just be true to yourself and invest in what you are comfortable in.

 

4) Set your Investing Goals & Strategies

Last but not least, it is always good to have a plan before you begin. What are your goals and strategies in investing in accordance to your risk profile? If you are aiming for financial freedom as your goal, what should you be investing in to achieve it? What investment products would best suit your strategy?

 

Personally for me, I do not have much time to monitor my investments on a daily basis. Hence, I’ve decided to invest in some dividend paying shares (like REITs) and some capital growth stocks for the long haul. Because my strategy is for the long run, I am not too concern on any fluctuations on the share price in the short term.

 

Summary

The beginning of the investing journey can be a nerve-wrecking yet exciting time to be in. Aside from saving for an emergency fund, paying off expensive debt, identifying your risk profile and your investing goals and strategies, take every opportunity to be ready to learn. There are so many available resources online and people you can ask to ensure the decisions you make are the best. Happy investing and I wish you a great investing journey ahead. Cheers!