The Basics To Consider Before Investing

Cast your mind back to your childhood days, and recall the sand castle you built at the beach on that bright summer's day. If you remember clearly, the best castle that you managed to erect was the one you went to great lengths to build a very good base for. It is the same with investment strategies; a very successful one has to stand on some basic blocks which are: home, pension, dependants and emergency fund.

Are you renting or buying your home? If you are buying your home, you are perhaps undertaking the largest investment commitment in your entire lifetime. It is important to make sure that the size and the terms of the mortgage suit your personal circumstances. Mortgage interest rates are usually higher than the rate you can earn on a bank, building society or other interest bearing security. Thus if you have funds to invest, it might be sensible to reduce the mortgage amount by a lump sum payment. The decision should be based on a thorough research and a comparison of various interest rates with that of the mortgage interest rate.

You should also make sufficient provision for your retirement. State pension is going to be very little in the future, and many employers are no longer offering final salary schemes to employees. Contribution rates are also being cut by employers. You should find out what your state pension, occupational pension and savings will amount to during retirement and if not sufficient, make provision for extra savings. If you are self-employed, you should consider a personal pension or stakeholder pension scheme.

Family concerns form a big part of the basics to look at before investing. How would your spouse or children survive if you should die tomorrow? Does your spouse have to return to work a lot earlier than planned? Will there be enough money to pay for childcare, if your spouse has to start working immediately? A common way of providing for these eventualities is through a life insurance policy. Term insurance is the cheapest kind that can be considered.

It is also necessary to have some money sitting intact and safely in an account to deal with emergencies. It should be possible to access this money instantly or on very short notice. This is the 'emergency' fund, and it will be a bad practice to put it in a unit trust or share, which can lead to fluctuations in the value of the underlying amount. An instant-access ISA will be a wise choice of home for such a fund. At the most, the notice period should be a week.

Dealing with other investments before considering the basics is like placing the cart before the horse. The basics without exception, should be always dealt with before attempting to invest any funds. It is advisable to separate the basics from the other investments in a strategy. This will rid the plan of confusion and provide peace of mind for the investor. At regular periods when there are major adjustments to be done in the plan, it is again necessary to ensure that all the basics have been revised and dealt with first.

David Opoku
BA Hons. Accounting and Finance. (Currently specialising in Financial Advising/Stockbroking).

E-mail: davido312@aol.com
Web : http://www.investmentyouneed.com/

I have a BA Hons. degree in Accounting and Finance. I am currently specialising in Financial planning.