The Motley Fool

3 Things You Should Consider Before You Start Investing

The Singapore stock market has returned around 7%, including dividends, since 2002. Some companies have beaten those returns hands-down. For new investors, it would be enticing to invest in stocks right away. However, before you start investing, you should consider whether you have done the following.

Have you paid off all of your high-interest debt yet?

The outstanding debt on credit cards attract a high interest of around 24% per year. With stocks on average returning 7% to 10% per year over the long-term, it makes sense to pay off any loans above this hurdle rate first.

By choosing to invest in stocks instead of paying off high-interest debt first, we are actually “losing money” due to the spread between the interest we have to pay and the investment returns we get from stocks.

Do you have enough insurance coverage?

Insurance gives us financial protection against a range of life-altering events. Insurance policies such as life and health insurance offer payouts to the insured or the dependents. We should consult our financial advisors to ensure we have adequate insurance coverage at all times.

If we were to invest in stocks before having enough insurance protection, we could be forced to liquidate our investments to pay off any hospital bills and other emergencies.

Have you saved at least three months of your monthly expenses?

As a rule of thumb, we should have a “rainy day” fund of three to six months of our monthly expenses set aside. This fund would come in handy during unforeseen circumstances, such as a job loss and so on. In a previous article here, I showed that Singapore Savings Bond can be a useful tool to park the “rainy day” fund.

Without such an emergency fund, we could, once again, be forced to sell our stocks prematurely.

The Foolish takeaway

The questions above are by no means exhaustive. However, by at least taking care of the basics, we ensure that we can start investing with peace of mind. As an additional guide, we should only invest money that we do not require in the next five years.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.