What Should I Invest My Money In?
As an investment advisor, one of the questions I get asked a lot is “What should I invest in?”
Generally, my answer is “nothing”.
Starting an investment portfolio is a good idea if you have all other aspects of your finances in order. To determine that we have a few questions for you to ponder.
Am I ready for an Investment Portfolio?
If you can answer yes to each of the questions below, then starting an investment portfolio might be a good idea, if not, then you’ve got work to do ☺
Are you earning more than you are spending each month?
The foundation of any good financial plan is a budget. Keeping on track of your spending and making sure you are living within your means is essential.
Do you pay off all of your credit cards in full each month?
Credit cards are a convenient way to shop, but they can be expensive. Credit card providers give you the option of paying a minimum amount each month because they love earning an average 17% p.a. from your spending. Don’t give them your hard earned money, keep the spending in check and pay off your credit cards in full each month.
One more tip, never withdraw cash on your credit card, it is a super expensive way to pay and you get charged interest day 1 on any amount you withdraw.
Are you comfortably paying your regular debt repayments (e.g. mortgage, car loans)? Could you keep paying them if rates increased?
Right now interest rates are at historic lows, much lower than the average interest rates on Australian mortgages of 8.7%. At some point rates will begin increasing and you’ll need to find a way to meet these payments.
Do you have 3-6 months salary set-aside in savings in case of emergency?
Setting aside some money in case of emergency is a good idea. This would cover you if you lost your job, or were unable to work due to medical reasons. Having income protection would also help if you couldn’t work due illness, however there is generally a waiting period of a few months, and you’d need to be able to make ends meet in the interim.
Have you got adequate insurance in place, particularly income-protection and life insurance for those with dependents?
Income protection insurance is designed to protect you if you are unable to work due to medical reasons, you can read more here [https://www.moneysmart.gov.au/insurance/life-insurance/income-protection] The insurance will pay out an agreed monthly income, usually up to 75% of your salary, however there is a waiting period in which you won’t receive any income, usually 1-3 months. If your household couldn’t get by without your salary, income protection could help.
Life insurance should be considered for anyone with dependents. Whether you are the sole income earner, or the unpaid home carer, your absence would leave a financial hole in the family if you don’t have life insurance.
Are you saving enough for retirement?
It might seem like a long time away, but the sooner you start saving for retirement the better. The reason behind that is compounding, even a small additional contribution can make a big difference when it is earning interest for 20-40 years. Another reason to consider topping up your super is that it can be tax effective. Super contributions paid by your employer are taxed at 15%, which for many is lower than their marginal tax rate.
Starting an investment portfolio before working through the questions above is a bit like eating dessert before dinner; fun at the time, but not good for your health in the long run.
About Your Guest Blogger: Emily Martin is the founder of Balance Impact, an online investment portal specialising in ethical investing. Over her 15 year career, Emily has created, managed and monitored both ethical investment and mainstream investment portfolios, whilst working in New York, London and Sydney. She is a CFA charterholder and holds a Bachelor of Laws (First Class Honours), Bachelor of Business (First Class) and a Diploma in Financial Planning.