This article first appeared on MoneySmart's Singaporeans Must Do These Three Things Before Jumping into Investing.
It's no secret that we're big fans of investing here at MoneySmart. It's not something that's "nice to do" if you "have the money". For most of us who don't have billion dollar companies to inherit from our parents, investing could be the only way we actually get to stop working one day. Unless, of course, you prefer to save up $1.38 million in cash, which is how much Singaporeans want to have when they retire.
But before you empty your bank account and take it to the nearest stock broker, it's important to note that there are certain preconditions for investing.
If you can't even satisfy the below criteria, you need to do so before you start investing your remaining money, since the amount you lose could completely wipe out whatever investment gains you make, unless you're the next Warren Buffet which let's face it, you aren't.
1. Pay off all high interest debt
If you've got high interest debt you just can't seem to pay off from month to month (damn those sales on Reebonz!), you absolutely need to make it a priority to pay it off before you invest your remaining money. That means if you have $1,000 in cash, put it towards paying off your debt instead of investing.
That's because the interest rates can be so high that even professional investors can't beat them. Take credit card debt for instance. You're usually charged 24 per cent to 25 per cent interest, even if you pay the minimum sum each month. To put things in perspective, investment gains of 5 per cent per year are already considered good.
Other forms of relatively high interest debt include other loans, especially the last-minute kind you take out at Ah Seng Moneylender Pte Ltd because you spent all your money one week before payday.
Assuming you're borrowing through legal channels, moneylenders should only be able to charge you a maximum of 4 per cent interest and late fees of $60, which is still a high amount especially when you take into account compounding interest. But there's nothing stopping them from charging you all sorts of administrative fees, which can go up to 10 per cent of the original loan amount each time!
2. Make sure you have an emergency fund
If you don't already have an emergency fund, you'd better start praying hard that nothing bad ever happens to you, or you could find yourself desperately trying to borrow money.
An emergency fund is basically a stash of cash savings you keep in case urgent and unexpected expenses arise. Depending on the stability of your job and income, you might choose to keep anywhere between 3 and 12 months' worth of monthly expenses.
Nearly half of Singaporean households live from paycheck to paycheck, a pretty dire statistic. This is obviously not the most pleasant situation to be in, but if you're going to spend every cent you earn each month, scrimping and saving to put together an emergency fund is even more crucial, since it's the only thing you'll be able to fall back on-despite the James Bond ads, you should not think of credit cards as your handsome saviour in times of trouble.
While some people seem to think it's a good idea to invest and build up your emergency fund at the same time, I think it's easier to focus on the latter first-better to eat bread and instant noodles for three months than try to cut corners for a year.
3. Educate yourself on your investment options and which ones best fit your goals
Once your finances are in order, it's time for the fun stuff-making your money grow. If that doesn't sound like fun to you, think of it this way-it's a lot more fun to earn money sitting back and waiting, than sitting at your cubicle working.
Don't fall prey to the misconception you need to become a walking Investopedia before you can afford to risk a precious cent. You only need to know enough to be able to effectively grow your money. And having the time and space to hold on to investments for the long term is often the main thing that helps people make money.
That being said, don't just go and buy all the same investment products as your grandma/mahjong kaki/taxi driver. You need to know what your investment goals are and which products will get you to where you want to be.
The biggest question you'll need to ask yourself is how soon you plan to cash out (for most Singaporeans, that means how soon you plan to retire). The more time you have, the more risks you can take and the more aggressively you can invest.
Get all of this stuff straight before you start and so long as you don't get too greedy and fall for some gold buyback investment scam, you'll be well on your way to becoming a bona fide investor. You should also follow us on Facebook if you're lazy to go dig up a million different resources to read.
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