How to prepare for investing in the stock market

Fsp Invest, 22 Jan. 2014

Tags: investing, new to investing, beginner, before you invest, short-term debt, living costs, emergency fund, preparing to invest,

If you’re desperate to start investing, you need to make sure you’re prepared before you leap in feet first. As with many things, by doing some preparation work, you can help your investing off to a successful start. So to get you ready, read on to discover two things you should do before you start investing in the stock market…

To get your investing off to a successful start, there are two things to do first, John Stepek in Money Week explains...

#1. Have no short-term debt

Before you start investing, pay off all of your short-term debt. This includes credit card debt, personal loans and overdrafts.

Why? It’s simple. You have to pay interest on debt. And you have to pay a lot of interest on short-term debt.

If you could borrow money at 7% from a bank for three years, and invest it for a guaranteed return of 12%, then it would make sense to take a loan and invest the money.

But that’s never going to happen. The interest you pay on short-term debt will always outstrip any return you can hope to make without taking a ludicrous amount of risk.

So investing (or even just putting money in the bank) while you still hold short-term debt is like using a thimble to fill a bucket with a hole in the bottom. A waste of effort.

Patch your financial leaks first. Then you can start saving.

#2. Have three months’ living costs to hand

Life happens. Geysers blow up. Roofs need mending. People lose their jobs.

That’s why you need to have an emergency fund. A pot of cash you can access immediately to cushion against life’s ups and downs.

How big should your emergency fund be? It depends partly on your circumstances. If you have dependents, you’re probably less keen to suffer a drop in living standards than if you’re on your own.

As a minimum, aim to have three months of living costs saved up. In other words, you could live for three months at your current standard of living without earning anything.

So there you have it, two things you should do before you start investing in the stock market.

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