2012Posted by Tom Hartmann in Investment, Managing debt | 0 comments
The government share offer of state-owned assets is bound to drum up more interest in investing. Is investing right for you, right now? Since we now have a window of opportunity to calmly think in general about whether to invest, let’s seize the moment.
Before any talk of share price, dividends, or a business and the industry it’s in, the question of whether you ought to invest right now begins with your own financial situation. Taking a clear look at your circumstances is the best way to make an informed decision.
Simply put, it may all come down to how much debt you are carrying – especially dumb debt. Take a moment to list all the debts you may have (credit cards, hire purchase, personal loans, car loans) and the interest you are paying on each. Sorted’s debt calculator can certainly help. If you have a mortgage, take a moment to plug in the details in our mortgage manager.
Now any investment you make should be measured by what’s in it for you. After all, you need to gauge what you get in return for putting your money into something that will certainly bring some risks with it (as all investments do). With shares, returns come in the form of dividends that a company pays. There is also the possibility that those shares may grow in value over time.
There are, of course, many things you could spend your money on. But the question is, which would be better for your finances – paying down the debt that you have or investing in shares? Even before knowing the details of an investment, we can already say that to be worth it, the returns from the investment would have to be greater than the amount of interest you are paying on your borrowings. That’s a big ask.
Both the debt calculator and mortgage manager show how much interest you could save if you put your money toward paying down your debts instead. Can you be confident that your investment in shares would earn more than that? If not, paying off debt first will provide a far better result to your net worth.
Another thing to consider is that if you are a member of a KiwiSaver scheme, remember that you are already an investor. The fund you are in will typically have some mix of shares, bonds, property and cash already, so you may even find that you are already invested in a certain company without realising. Contact your KiwiSaver provider to learn more about the investment choices they’re making on your behalf.
If you are thinking about borrowing money in order to buy shares – what’s known as ‘gearing’ – be aware that it can be risky business. The vision of high returns can be fantastic, but the losses can be huge in bad times. Risks become magnified. And if you are borrowing against your house to invest, you could lose your home if the investment goes bad and you can’t keep up your loan repayments.
Here at Sorted we're fans of emergency funds – setting aside at least three months’ expenses in order to cover the unexpected, such as sudden home or car repairs, or a temporary job loss. Before starting to invest, and if you haven’t already, you should definitely consider building your emergency fund. Since money tied up in investments can be difficult or costly to free up in case of emergency, it’s wise to have an emergency fund at the ready instead.
In the end, if you find that you indeed have money saved that would be better invested than simply sitting in a low- or no-interest savings account, sounds like you’re ready to consider shares in your mix of investments. It may be time to study a given industry and choose which business you’d like to own – even if it’s just part of one (a share).
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