Maybe you’ve had an unexpected windfall, or maybe you’ve had a raise. If for whatever reason you’ve got a little spare cash available, you might think the sensible thing to do would be to invest it for the future rather than frittering it away.
This is definitely a good choice, but only if your underlying finances are in good condition. Before thinking about investing in stocks, Bitcoin, or any other potentially lucrative vehicle, it pays to get your financial foundations in shape.
Build a Rainy Day Fund
Putting a sum of money aside where it’s quickly available if you need it isn’t very exciting, but it’s one of the best financial moves you can make. Emergencies happen. If you can’t handle a sudden expense without borrowing, use your spare cash to build a rainy day fund rather than tying it up in an investment.
Check Your Insurance Cover
Insurance provides a more formal kind of emergency fund. If your health insurance can’t cover you for an extended illness or your home insurance won’t compensate you for a disaster, then plugging these gaps is a sensible use of your money. Hopefully, you’ll never need to make a claim, but if you do, having sufficient insurance cover could stave off financial catastrophe.
Clear Expensive Debts
It’s often said you should clear all your debts before investing anything, but this isn’t necessarily true. A safe investment with decent returns can often be a better use of your money than paying off a low-interest debt such as a home loan.
However, if you have expensive debts such as credit cards, unsecured loans, or bank overdrafts, clearing these should definitely be a priority. It’s very hard to find a non-speculative investment which will return enough to cancel out the interest you’d otherwise pay.
Formal Withdrawal Investment
But if your financial basics are strong and you’re ready to start investing, don’t go straight for an exciting but risky option such as the stock market or a cryptocurrency. Setting up a solid retirement plan may not be quite so thrilling, but it’s an essential way of providing for your future. Put at least some of your investment funds into a safe vehicle before taking any risks, no matter how lucrative they may seem.
Investing spare funds is definitely a better idea than wasting the money on short-term purchases. But getting your overall finances in shape before investing a cent is the soundest kind of financial planning of all.
Why Choose Aman Financial Planners?
A Fee-Only financial planning firm based in UAE, with a satellite office in Jeddah, Saudi Arabia. We provide an independent, unbiased, objective review of your financial situation, and seek a long-term ongoing relationship to help you meet your financial goals. We are trustworthy, someone who cares, listens, understands and passionate about helping you.