What to do before starting an investing program
Before you start buying stocks and other investment instruments, there are a couple of things that you should address in order to avoid putting yourself in a difficult financial position.
First of all, you should have an adequate emergency fund comprised of liquid assets and/or the availability of a low cost line of credit. The emergency fund is very important because if you need money for an emergency and you do not have adequate liquid resources to deal with it, you will be forced to sell investment assets to raise cash. This forced selling could occur at inappropriate times (when stock prices are temporarily depressed) which will negatively impact your future net worth because it diminishes the effects of compound interest. The size of your emergency fund should be based on factors such as the amount of your income, the reliability of it, your fixed expenses and the like. Generally speaking, most people should keep from three to six months of your expenses in an emergency fund. Make sure the fund is held in a taxable account, if not you might end up paying penalties for early withdrawals.
The second consideration is to ensure you have adequate insurance in place. If not you could be left destitute by medical bills, a substantial liability judgement or leave your family in a difficult financial position due to your physical disability or death. When buying a life insurance you will have to decide between buying term life insurance or a permanent life insurance policy. We’ll cover the details of the two in a separate article but for most people term insurance will provide a better value and allow you to purchase more insurance coverage at lower premium cost than permanent insurance.
Once you have your emergency fund in place and adequate insurance coverage in force you are one step closer to investing in the stock market. The next step will involve defining your financial objective which will in turn drive the investment strategy you select in order to achieve it.