10 Steps to take before you start investing


10 Steps to take before you start investing

The other day during a networking meeting a lady asked me the question: Katherine, you are a financial planner, so tell me:

  • How do I go about choosing the right investment for me?
  • Where do I look?
  • How do I choose?

This is a very legitimate question and finding the answer is not easy.  The world of investments unfortunately or fortunately (depending how you look at it) is enormous and can be confusing as well as overwhelming. So, to make those investing decisions easier, with clarity and certainty, today, I would like to show you my 10 steps process that I go through with my clients as well with my own savings to:

  • minimise mistakes or unnecessary costs and
  • improve the overall investment outcome and experience.

As Tony Robbins says, when it comes to money, savings, spending, investing – 80% is psychology and only 20% is mechanics.

I have created many videos where I have been talking extensively about money psychology and goals setting so feel free to watch them. This is where I covered the 80% money psychology (this is the link to those videos): 

Assuming that you have your money behaviour under control, now is the time for 20% mechanics.

Although it is only 20% it is definitely a very important part, as your final outcome will be then dependant on the level of your knowledge and the strategy you implement. 

Please do not start immediately thinking about the underlying investments, as this is the reason for confusion and overwhelm. Instead, we need to reverse engineer your thinking.

1. Spend time to think and define your goals – and I am not talking about your financial goals, but rather your life goals. For example your want to: 

  • have this special holiday to travel through Europe &
  • to buy a new car &
  • you dream of enjoyable and exiting retirement. 

When thinking about your goals, go into details about them, take a piece of paper and list what you want to do during your holiday, what places you want to visit, how you are going to travel, who you will go with.

Or what car you want to buy, what colour, what features it should have.

Or retirement what you actually want to do during your retirement, your hobbies or activities that you enjoy, but you’ve never had time to do.

Go ahead and imagine your exciting holiday, your dream car, your perfect retirement.

The more details you list for each goal, the more emotional connection you create to that goal and the more likely you will stick to the plan to actually achieve all those goals.

The purpose of your investments is to build an asset or an income stream to support achieving your goals and by having this clear picture, you will know exactly why you are not to enjoy your money now and why you are delaying gratification.

But you need to have a very clear picture in mind.

2. Give each of your listed goals an indicative time-frame – Once you have listed your goals, decide on a time-frame of when they are to be achieved. For example:  

  • Travel in Europe in 4 year,
  • New car in 5 years,
  • Retirement in 10 years 

3. Decide on the $$$ value of each goal – you might need to do a bit of research, but this should be fun planning on your travel, what you are going to do, what places to visit, how to get there and what is the total cost of the trip, so you know exactly how much you need to save. For example: 

  • my trip will cost me $20,000
  • the car chosen will cost $30,000
  • I need $60,000 p.a to continue my lifestyle in retirement

4. Budget – unfortunately, you have to go through that exercise, to know where your money is going and what’s your surplus. through a budget spreadsheet. If you dislike doing it, use my 50/30/20 rule budget – again there is a video explaining this in detail. This is one of my first videos when I really felt very uncomfortable in front of the camera, so my apologies for that, but, I think, the information is nonetheless helpful. 

After doing the budget, you should know precisely how much you can be saving from each pay, each month, or maybe you have a lump-sum to invest. If however, you find that your savings are not high enough to reach your goals, well, review your budget and do some expense cutting.  This is where you have to make a choice, which is more important, your future goals, your trip, your car, your comfortable retirement, or today’s lifestyle. This is your decision.

5. Connect your goal with your calculated surplus from your budget – how much do you need to save towards each goal. Once you know what your total surplus is, you need to decide how to split it between your goals, to achieve them all.

6. Look at tax, income, and asset position – you have to understand the tax system in your country to be able to understand the difference in tax liabilities between entities, understanding those rules will help you with step 7

7. Decide the investment structure – who is the owner of this investment. This needs to be done for every single goal you have, as each may require different ownership for the reason of tax levels, assets liquidity, or assets security.

So it is very likely that investment for your holiday could be on your name, as liquidity is required in 4 years.

Re. car if you run a business through the company structure, maybe you should invest via company structure and buy the car under such ownership – this needs to be discussed with your accountant.

Saving for your retirement is not brainer – retirement funds, known as superannuation are the tax-effective way of such investing, but be conscious of limitations of access to funds.

8. Understand your investment risk profile – your investment risk resistance, how much volatility, or loss are you willing to accept for each investment. again, this could be different for each goal.

9. What platform you want to keep your investments – for example if you decided to start a share portfolio as your preferred investment type to reach your goals – do you want a DIY low-cost online broker, do you prefer to invest via managed funds or mixture. You will need to make lots of research to find out the best options for you.

And then finally,

10. Choose your underlying investments – what particular shares to buy, or which specific managed  funds you like, or mixture or investing via  ETFs (Exchange Traded Funds) or maybe you wish to concentrate on ethical investing. 

Those are my 10 steps for successful investing, and I hope applying those steps will assist you in your investment process being less stressful, more enjoyable, and most importantly purposeful.

If you would like to learn more, feel free to check out my short book: 12 Principles of Investing, where you can learn even further about what makes investment work and what doesn’t, and how to grow your investment portfolio based on proven principles, so you don’t have to reinvest the wheel yourself.

If you want to make sure you do not repeat financial mistakes most of us make, read this book: 13 Financial Mistakes We All Make. This will help you stay away from silly money behavior and concentrate on creating your own financial nest-egg for a safe future.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

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