How to start investing – First steps

Business photo created by schantalao - www.freepik.com
Business photo created by schantalao - www.freepik.com

As a general rule, most people shy away from investing because they don’t know the basics of how to start investing. And the best investment you can make is to invest in yourself and in knowledge.

To start your first venture you generally have to organize your personal finances, something that can be divided into 3 steps.

1st – Create and manage a budget

If we want to achieve financial goals we have to know and control our spending. To do this we create a budget. Thus, the budget will be the financial tool with which we record the amount earned in the month and from which we subtract the amount of expenses in the same period. These expenses can be further categorized as necessary expenses, where we consider for example movements like rent payments, insurance, food, and discretionary expenses like entertainment, dining out, traveling, etc…

The way to prepare a budget is by recording all movements of income and expenses. In a quick search on Google, we can easily find several Excel templates with pre-created tables or even smartphone applications.

This record allows us to be more aware of the use of money, where the ultimate goal will be a better reflection on spending. By doing this with a financial goal in mind you will be able to analyze certain expenses and evaluate if they are in fact a necessity or not and start treating each Euro as an investment.

2nd – Paying off debts

After creating and managing a budget, the priority should be to start paying off any unpaid debts. Obviously, this will depend on the interest, whereby the debts with the highest interest to be paid should have priority to be paid off. Assuming that the interest is above 4 or 5%, paying off that loan is the best investment you can make.

Having completed the initial planning phase, the priority now becomes to pay off all debts. Considering the influence of interest, the ideal method would be to start by paying off the debts that have the highest interest rate. This will be our first investment: paying off the loans.

There are still some exceptions, such as mortgages whose time horizon reaches tens of years, and as already mentioned in these articles on financial education, the ideal is to start investing as early as possible, in order to monetize capital over time.

3rd – Create an emergency fund

Financial investments have their pros and cons. If it is true that investing well brings added value, it is also true that to do so you have to take some risk, both in terms of exposure and time. One of the best ways to reduce the risk will be to take a preventive attitude and create an emergency fund. The purpose of the fund will be to create reserves for unexpected expenses such as a medical expense or a car repair, without having to use the invested assets and especially without creating new debt.

As a suggestion, we would advise you to accumulate a fund of at least 6 months of salary income in a time deposit. This way the money would be easily accessible and still associated with a small income from the interest on the deposit.

Conclusion

Time is money, the best thing to do to prepare for the future is not to procrastinate. We must create a commitment of our own to motivate financial discipline. Establishing a budget plan is essential and allows us to control the execution of our goals. Initially, we should divide the monthly amount into necessary expenses, emergency/savings fund, and finally investments.

The percentage of the division is variable, taking into account the initial value and especially the value of the necessary/fixed expenses, but ideally is to allocate at least 20% of the monthly income in savings/investments. The other 80% ends up being somewhat discretionary, depending from person to person

Visit the Disclaimer for more information.