LOUISE FAIRSAVE: Investment steps
WHEN IT COMES TO making good investments, there is no one solution that is right for everybody; your choices are best made on what you like, your goals and your risk profile.
However, this article outlines a generic strategy by presenting 4 steps to get you from where you are to where you would ideally like to be as an investor: from just surviving day-to-day to becoming a true investor.
The very first step is to get rid of any high interest debt like credit card balances or personal bank loans. Where the interest you pay on such loans may range from 9 per cent to over 20 per cent, paying off the balance on these loans translates into you earning that same 9 per cent to 20 per cent level of interest on your cash. Alternately, the same cash deposited to a bank account will likely earn interest income of less than 2 per cent after tax. So, do not even think of more significant investment steps until you have pressed yourself to save more and dismiss such high interest debt.
The second important investment step involves acknowledging the need to save for retirement. This can be done by setting aside a consistent part of your savings, no matter how small, towards retirement. The investment of these funds will likely be for a longer term which provides access to higher interest earnings. Any tax incentives offered for such saving should be utilised to the fullest extent possible. An example of the investment vehicle for these funds is a balanced mutual fund. More on this later.
The next major step is to continue saving in order to accumulate an emergency fund of at least four months’ typical expenses. Any investing needs to be built on bedrock of continuing savings. Your emergency fund savings should then be invested in ways that allow the cash to be readily available if needed.
For example, emergency funds savings can be invested in a credit union, a commercial bank or even in Government Saving bonds. These are options that allow your funds to grow in value yet remain available to you at short notice if necessary. However, treat these funds more like insurance against the contingencies of life rather than the basis of pursuing high investment returns.
Then, you continue to save, as the next major step is when you start to face real investment hurdles head-on. Yes, you have paid off that high interest debt, got into the habit of saving towards your retirement, set aside your emergency fund, and now you have save say, $2 000, which you wish to invest for the long term.
Before you commit to any particular investment, you need to consider what your investing will fund in your life and when, what kinds of investment risks you can tolerate and what you would really like. Will you need to access these funds in 5, 10, 15 years or more? Will you be ultimately investing in real estate – land or land and building; in a business; in a lifestyle change; in another planned acquisition or in funding a pleasure trip from the interest earnings on the base investment.
Where the investment horizon is short, deposit to a credit union account or a certificate of deposit with a commercial bank are options. For longer term horizons, investment in bonds, mutual funds, or company stock can be considered. This is when real expertise is built in investing as you test and hone your pursuit of the highest returns possible given your particular likes, risk profile and understanding/experience with various types bonds and stock.
You task is to define where you are on this continuum of steps toward becoming an experience and accomplished investor.
Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.