How to Start Investing

Getting started with investing can seem like a daunting prospect, but it doesn’t have to be.

With some careful thought and planning, anyone can get started with investing and begin building wealth over the long run. With this in mind, here are 5 simple but essential things to focus on at the start of your investment journey.

Make a plan and stick to it

It certainly pays to sit down, outline your financial goals and develop a plan for how to achieve them. But it’s not enough to simply develop a plan for how you want to invest. You have to stick to it.

That’s easier said than done. Markets can be volatile and it’s tempting to deviate from your plan when the going gets rough, but trying to time the market doesn’t pay off in the long run. Rather, it’s time in the market that helps build wealth over the long run.

It’s a good idea to make a Systematic Investment Plan (SIP). With a SIP, you invest a fixed sum each month on a consistent basis, averaging out your costs and benefiting from the power of compounding, since your money stays invested and grows over time. This approach helps you to stay on track and not deviate from your plan.

It also pays to share your plan with loved ones to create accountability and condition positive behaviors. Studies have shown that publicly sharing your progress can help motivate you to accomplish your goals. So, inform your close friends and family of your plans and ask for their support.

Track what you spend

Most people know what they should do to improve their financial affairs. But spending less and saving more is easier said than done.

Tracking your outgoings can help. The 50:30:20 Rule can keep us on the straight and narrow when it comes to spending. The rule considers your net earnings after tax (take-home pay) and states that:

50% should be spent on everyday needs, including rent or mortgage payments, food, healthcare and other essentials.
30% goes on nice-to-haves, like shopping for clothes, vacations, socializing and fun things like that.
20% should be saved, in order to build a small nest egg that can be invested. We will explore this in more depth later in the article.

The beauty of this approach is that it sets you up for long-term financial success whilst providing short-term protection against things that are outside of your control. Sure, 20% is an ambitious target, but it’s worth being ambitious when it comes to planning for the future and securing your retirement.

Minimize debt

Another important thing to consider before you begin investing is minimising the amount of interest payments you make on a monthly basis.

The reason we advise minimizing debt (rather than eliminating it entirely) is that paying interest is a fact of life for many people and it’s simply unrealistic to pretend otherwise. Any credible financial plan needs to account for the fact that most people have mortgages, credit card bills and overdrafts to pay.

Having debt doesn’t mean that you can’t invest for the future, but it does mean you need to be careful and minimize interest payments where possible, as they can hurt your ability to build wealth over the long term.

Not all debt is bad debt. After all, many people take out a mortgage in order to buy their own home, or get a bank loan in order to start a business. But it’s crucial to pay down short-term, higher-yielding debt (or “bad debt”, as we call it) as soon as you can. This will reduce your outgoings, increase the amount you can afford to invest, and put you in a stronger position should you encounter financial difficulties.

Establish an emergency fund

In order to think long term, you first need to consider the here and now.

Life is full of ups and downs. So it’s essential to protect yourself from expected financial headwinds by making sure you have a safety net.

We recommend saving enough cash to cover at least 3 months of expenses for you and your loved ones, but preferably 6 months. This will give you enough time to resolve any underlying issues with your finances and establish a sustainable source of income.

Understand your options

Finally, before you start investing, it’s prudent to build a healthy understanding of your investment options.

Before committing to any one provider, make sure you have a solid grasp of the fees they charge. High fees erode investment returns and hurt your chances of building long term wealth. It’s also worth checking lock-up periods for your cash – it’s no use building wealth if you can’t access it when you need it.

The choice of investment options can seem overwhelming, so it’s worth considering platforms that automate the investment process for you, using tried and tested techniques adopted by expert investors including risk tailoring, global diversification, dollar cost averaging and automated rebalancing.

Sarwa does all of these things. Our platform makes high-quality investments accessible and affordable to all. So drop us a line if you’d like some advice on getting started with investing.

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