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3 Personal Finance Aspects to Look into Before Investing

Today, millions realise that it takes more than a full-time job to attain financial security. There is a need to find or create multiple sources of income to get ahead financially. As I write, the stock market remains a popular destination for many to earn passive income and to build wealth over the long-term.

Indeed, you can move one step closer towards financial freedom through stock investing. However, most fail to do so as many of them choose to bypass the one thing that is needed to be in place first before investing in stocks.

So, what is it?

It is to get your personal financial in order. Now, if you find this answer rather boring, perhaps, stock investing is not for you.

In fact, stock investing can be boring for many as it involves crafting out a plan and a strategy to build your wealth over the long-term. Seriously, stock investing is not about excitement, hype, or chasing the next craze.

In this article, I will list down four key things to gauge whether you are fit to start investing in the stock market. If you are reading this, you can take it as an assessment of your financial standings before investing. If you find yourself lacking in any areas mentioned, that is good news for you as you have discovered what you need to take care of to improve your financial standing. Let us begin.

Settle Your Unsecured Debt

Unsecured debt is debt without collaterals. This includes your credit card debt or personal loans. In most cases, unsecured debt charges higher interest rates as compared to secured debt such as mortgages and hire purchases. If you have any outstanding credit card debt or personal loans, it is best for you to make a priority to pay off these debts over investing in the stock market.

In general, the amount of interests saved would exceed the potential amount of dividend income earned from your stock portfolio. Capital gains would be excluded from this equation as they are not guaranteed. You can bet that the interest payment to be a bank is guaranteed if you do not settle your debt.

Have 6 – 12 Months Worth of Expenses

You might have heard, ‘Save for a rainy day.’ This applies universally to all whether you are an employee, self-employed or a business owner.

For instance, if you spend $2,500 a month, I believe, it is practical for you to put aside $15,000 (six months) as your emergency fund. If you have a family, perhaps, you might be more conservative. If your household spending works out to be $7,000 a month, then, you may want to set aside $ 84,000 (12 months) as your family’s emergency fund.

This sum comes in very handy if you plan to switch jobs, to go into business, or have unexpected bills that come your way. If you invest without having an emergency fund, you may risk disposing your money making stocks in times of need.

Get Covered

If you spend $2,500 a month, have placed $15,000 as your emergency fund, and still have excess, hold your horses. It is prudent to review your insurance policies.

Today, it is not sufficient to just have a policy. The question is whether your sum assured is adequate to mitigate the risk of financial loss in any untoward incident such as hospitalisation, critical illnesses, disability, and death. The logic is simple. If you are hospitalised, how do you intend to settle your medical bills? Is it from your insurer or from your stock portfolio?

Conclusion: I’m Well Prepared.

If you are financially fit, then, you are ready to explore the abundance of opportunities which are available to you in the stock market.

If you do not have a plan, an investment strategy or the know-how to make money in the stock market, I believe it is best to invest time, effort and some money to get yourself educated before investing. After all, stock investing is a journey of continuous learning and improvements.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.