Yes… Every kiasu Singaporean wants to make it big in life, you included! But before you begin jumping into the big big world of stocks to get rich!, here are three essentials to grant you a peace of mind before you begin your investment journey.
1. Zero High Interest Debts
Before you begin investing, have you cleared all your high interest debts?
Credit cards are well-known for their skyhigh interest rates of 24% per year, and any unpaid amount will definitely snowball under the compounding effect.
Stock markets however, only average an annual return of 9%, following the benchmark of the Straits Times Index (STI).
Comparing the rates of both credit cards with stock markets, it therefore makes the most financial sense if you pay off your credit card debts before entering the stock market!
2. Sufficient Insurance Coverage
Do you have enough insurance?
To understand the purpose of this, it is important to know that once you put your money into the stocks, they are usually “locked in” for a period of time. What do I mean by locked in? Simply put, it’s the same logic as buying a product. For example, if I were to buy a Macbook with $2,000, my cash will be trapped in this product. Should any cash flow issues arise due to emergency medical conditions, it would require a certain time period before I am able to retrieve my cash (albeit at a loss) from the sale of my Macbook.
Bringing us back to the point of having sufficient insurance. I’m sure most of you reading this knows the purpose of having insurance – to reduce financial uncertainty, and manage accidental losses. To find out more, do arrange a consultation with any trusted financial advisors!
Having sufficient insurance prevents us from liquidating our investments to make ends meet when these accidents occur!
3. Rainy Day Fund
Have you set aside a sum of emergency funds?
A general rule of thumb would be to set aside three to six months of our monthly expenses. This fund will have the following purposes:
- Prevents the need to liquidate investments
- Minimises the need to tap into credit lines
- Covers any sudden expense related emergencies
There is no clear-cut amount to be set aside, but it is recommended that those with less stable jobs, or earning variable income set aside amounts nearer to six months. If you are still unsure, there are many emergency fund calculators online that will give you a much better idea of how much to set aside!
However, this may not be a “more is better” situation. Having an excess in your rainy day fund will lead to a decline in potential returns as the money could be put in low-risk investment products in order to generate a higher return than your savings account.
Once you have taken these three essentials into consideration, you are one step closer to investing as you progress towards financial freedom!