Investing money requires you to follow some basic rules. Any investment program will be successful if you follow these rules and apply them as a whole. The rules are not sequential so the order is not important. This is the first of a three part article guide covering ten golden rules to investing money sensibly and intended to help any investor reduce their financial risks.
Rule One: Get Rid Of Debt
As a general rule, if you are investing money you should not have debt. The reason for this is that you cannot be sure that you will receive a tax-free return from your investments that will equal or exceed what you are paying in interest on your debt. Obviously this rule does not apply all the time as you could simultaneously be paying back your home loan while contributing to a retirement fund. However, the trick is that when you have repaid your debt you should use that money as a source of money for investment.
Rule Two: Know the difference between investment and saving
Saving money is not investing. Investing means taking risks with your money to make it grow for medium to long-term goals. Saving is a way of accumulating money to invest or to meet some short-term goals. With savings you are building up your resources; with investment your money is working for you. With saving, your money normally earns interest, often nominal interest below the inflation rate. Investing means seeking total growth of your money, which includes, importantly, capital gains.
Rule Three: Set Goals
If you don’t know where you are going you will never know how to get there – you must set investment targets. These should be medium to long-term. You should not have one general target. Separate goals may include retirement, an overseas holiday, or paying for education of children. The main reasons for separating your investment targets are:
- The different time spans required to reach each target;
- The priority accorded to each target; and
- The investment risk you can afford to take to reach a target (eg. you can take greater risk with an investment to buy a Ferrari, but not with your retirement investments).
The best way to set your targets is to have a financial adviser undertake a financial needs analysis for you. These computer-driven programs will help you identify what investment plans you need, how long you will take to achieve your targets and what is and what is not affordable.