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Friday, January 04, 2019

What to Consider before Start Investing

One would not go for skydiving without training and parachute. Similarly in wealth building process, one should not jump straight into "investment" without reviewing their current financial situation and plan beforehand.
Opps, there are peoples skydiving without parachute ? OK, bad analogy, but you get my point.
Before you start your investment journey, it is important to understand and prepare for the following:

1) Cash Flow
You would have to track your monthly income & expenses and record it down. With this, you are able to know where your money is going to. A positive net cash flow is the key for wealth building. If your net cash flow is in negative, then you would need to cut down on your expenses. There are lots of free apps for this purpose, or you could DIY yourself with spreadsheet.
Sample created by Excel
2) Net Worth
Similar to the above, only this time round is to check on your assets & liabilities. If your net worth is in positive, congratulation. If it is in negative, you would have to find ways to reduce your liabilities. How to reduce liabilities ? Save and reduces expenses to pay off debts.

Sample created by Excel
3) Emergency Fund
Save up emergency fund for min. 3 months worth of your expense. Some would advise to save up 6 - 12 months expenses, it is all depends on individual preferences and circumstances. Do not invest all your money, as market can be volatile and you may be required to cash out at lost during emergency.
My children's doggy kitty piggy banks
4) Insurance
Purchase insurance plan to protect assets and your loved one, especially when you have dependent. There are various types of insurance: health, accident, term life, whole life , critical illness, mortgage, home and others.

Health insurance is a must as cost of medical is expensive and it could easily wipe up nest egg that you built for years. If you have dependent, then it is important for you to have term life or whole life insurance which pay out upon your death or permanent disabilities. The same goes for mortgage insurance if you have dependent and outstanding housing loan to service.

It would be good to have a list of insurance policies that you and your family having and keep all in one place. Some insurance agents would do insurance summary free for you, all you have to do is ask them. If you are paying premium yearly through GIRO, then it is even more important to have the list with payment date. You do not want to miss out any payment and lost your coverage, do you ?
Sample of what my insurance agent done
5) Debt
After saving enough emergency fund and have sufficient insurances for protection, the next step would be clearing off high interest debt. Some high interest debt examples are credit card debt, personal loan, renovation loan, with credit card interest rate ranked the highest.

Logically speaking, you should start paying down highest interest debt to maximise the reduction in interest expenses. However, this may not always the case; for example, car loan interest is computed based on  initial loan amount, paying down car loan won't help to reduce any interest expenses. Do not solely look at advertised interest rate, ask for effective interest rate (EIR) before getting any loan.
6) Goal
Set a S.M.A.R.T. goal and plan for how you want achieve your it.
Your goal should be concise on what you want and could accomplish with your available resources in a certain time frame. It should be measurable so that you could track your progress. Be honest to yourself, do not set an easy goal for the sake of goal setting. I will cover the basic of dividend investment planning in next post.

Investment is not a grow rich quick scheme and every investment come with risk, that is why it is very important to set your financial foundation solid before you start investing. I hope the above information are useful to you, feel free to leave comment or contact me.

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