Am I Ready to Invest? 5 Signs to Help You Determine Your Investment Readiness

You may be wondering if investing is right for you. Here are 5 signs that you are ready to start your investing journey.

1. You have an emergency fund- There are no financial products labelled 'emergency fund' but the best products are usually one that can be accessed at very short notice (in case of an emergency, you often need money right away!) while a secondary characteristic would be a reasonable interest rate (don't expect amazing rates). For this reason, regular bank savings accounts or a money market fund may be the best options. Money market funds are mutual funds than invest primarily in short term securities like treasury bills that mature in less than a year. The Trinidad market has many savings accounts with differing rates of interest as well as several money market mutual funds. Bonus Tip: There are some unique fixed income mutual funds that have a fixed net asset value- meaning you purchase in at a set price, say $100 and then is guaranteed to get back at least the same $100 when you decide to withdraw. For savvy investors, this makes a great place to potentially earn superior returns on your emergency fund while having access to your capital at short notice (typically not same day). Why do I need an emergency fund in order to invest?: Investments are usually long-term in nature and prices in financial markets can fluctuate so when an emergency happens you do not want to be forced to liquidate an investment that has dipped lower than the original investment amount. Remember when covid-19 hit? Many persons lost their jobs or had to close their businesses while most investments declined at the same time.
   

2. You have sufficient insurance coverage- What is 'sufficient'? There are two aspects of sufficient - you have the right types of coverage and you have the right amount of coverage. Everyone needs health and dental insurance as well as critical illness insurance. Persons who have financial dependents may want to have life insurance to provide for their loved ones if they are no longer around. You need asset insurance for high value items like your home and car as well as to insure against labilities that can stem from owning and using those items (e.g. car insurance provides coverage to pay for damage to other's vehicles if the accident is found to be your fault). Persons without dependents and who don't plan on having dependents may opt not to have life insurance. What amount is sufficient coverage is somewhat subjective but there are rules of thumb to help you decide how much insurance you need. I will save those for another occasion.
   

3. You don't have or have paid off all your high interest debt- I consider high interest debt as any debt that carries a rate of interest higher than the average moderate investment would typically yield. At present that can be any debt with an interest rate higher than 8% per annum. These typically include credit card debt, unsecured loans and hire purchase loans. If you have excess cash, these funds should go towards paying off these debts before you consider investing. Why? Because the rate of interest on the investment is lower than the interest rate you pay on the loan. If you earn 8% per annum on your money over 10 years but continue to pay 12% on a loan then you are locking in a 4% loss per annum. Instead you should divert cash resources to paying off that debt first- save yourself the 12% interest cost.
   

4. You have a budget and actually follow it - Having a budget is no good if you don't continuously track where your money is going. I personally set a budget before the beginning of every year- I set out what my family typically earns monthly then categorize spending into major categories and place a budgeted figure for each expense. Budgeting doesn't stop there, I periodically track how much we spend and earn for each category. Are you earning less or more than budgeted? Are you spending more or less budgeted? Actively tracking your expenses may surprise you. I know many persons who were horrified by the amount they spent on dining out or subscription services they don't use. Keeping an active budget helps you learn about yourself and take corrective action to your money behaviors. In the context of investing, having a budget and sticking to it ensures that your investments can strive. With enough cash flow to deal with day to day expenses that you keep at bay, allows you freedom to give your investments time (time is a key ingredient to your money growing thanks to the magic of compound interest). It also instills investment discipline, if you have excess cash after meeting your expenses, you can periodically contribute to your investments - allowing you to take advantage of dollar cost averaging.
   

5. You have set SMART financial goals- Investing for investing sake often leads to poor outcomes. I encourage everyone to take a goal oriented approach to investing. What would I like this investment to do for me ? Do I want to have enough for a down payment on a 3 bedroom house with a yard, in central Trinidad in 5 years? Do you want to have 100K in 3 years to pay for a masters programme? Would you like to retire at 55 with at least 10K per month in income? Be SMART about your goals. Your goals should be Specific, Measurable, Achievable, Relevant and Time-bound. Be as elaborate as you can with your planning because vague goals lead to disappointment. If you want a home, what kind of house? how many bedrooms? square footage? what part of the country? Look up real estate websites, look at options, talk to an agent about color on market dynamics (even if you don't have the funds yet). Setting these SMART goals for your investments is translated into a plan involving dollar figures, estimated returns and timeframes. For example, you know if you put 30K today into a diversified fund, then contribute 2K every month to it, and the funds earn at least 5% per year, that money can grow to ~175K in 5 years - enough for that sizeable down payment you wished you have for your goal of owning a home (get familiar with time value of money calculators).

If these 5 signs are very familiar to you and you've covered them all, then you are READY TO INVEST! I'd recommend seeing a registered investment advisor (FYI I am a registered investment advisor but I would be happy if you see any registered advisor). See https://www.ttsec.org.tt/easi/registered-companies-individuals-and-securities/ for a full listed of registered advisors. Book a free discovery session here.

If you are not familiar with these, or have not covered them all. Now is your time to put a plan in place. If you need help putting a plan together, you likely need to see a financial planner. I do limited free consultations (1 person per month since I have limited time) and I am happy to refer you to paid financial planning service providers (I currently offer complimentary financial planning services to wealth management clients only).

Happy Investing! Happy Financial Planning!