Household Investing Tips

Things to Do Before Making an Investment

Sep 13, 2009 Wei Yin Wong

To start investing, families should reduce household debts, have ample insurance, keep 3 to 6 months income in a savings account and get professional investment advice.

For many households, investment income is a nice regular financial boost. Obviously, the first step towards investing is to read up as much as possible on the investment market and research on prospective assets.

Still, there are other important things to do before making an investment. Read on for more household investing tips.

Reduce Household Debts

Families with big debts shouldn’t have any savings or investments. They should use any spare cash they have to pay off their debts first. After all, why earn only 6% on interest in a fixed-term deposit while having to pay more than 18% on interest on credit cards? One of the first things to do is to reduce household debts as much as possible. In general, household consumer debts should not exceed 15% of the take-home pay before making an investment.

Have Ample Insurance for the Family

Delay investing until the family is adequately covered with insurance. The family’s breadwinner is its biggest financial asset. If he suddenly loses the ability to earn money, the whole family will be in dire financial trouble. Forget about investing in property and shares first. Instead, make sure the family is protected with a disability or income protection insurance. If possible, opt for an income protection insurance that pays up to 75% of the income if the breadwinner can’t work due to an illness or accident. There must also be adequate life insurance, home and home content insurance and car insurance.

Keep 3 to 6 Months’ Income in Savings Account

It’s important to diversify investments in different asset classes – property, shares, fixed interests and cash. Property and shares are probably the highest-bearing investments. However, they also carry a lot more risks compared to cash investments. Fixed interest investments often have higher interest rates than standard bank accounts but there is limited access to the money before maturity.

Therefore, it’s important for an investor with lots of shares, properties and fixed interest to have 3 to 6 months’ income parked in savings accounts that can be easily accessed. That way, the investor won’t be tempted to sell investments at the wrong time or penalized heavily if he suddenly needs to use a considerable sum of money urgently.

Get Professional Money Advice

Many families will seek professional money advisers before embarking on an investment scheme. That’s a wise move. However, be sure that the advice is not influenced by the adviser’s professional connections. Stockbrokers will promote shares and likewise, fund managers will try to sell managed funds. Financial planners in banks and other financial institutions will also often sell their companies’ financial products. Ideally, find an independent money adviser or financial planner who is not connected to any product or company. Even so, getting a second or third opinion is highly recommended.

There are a few things that a family should do and consider before making an investment. Household investing tips include reducing household debts, having adequate insurance for the family, keeping 3 to 6 months’ income in an easy-to-access savings account and getting independent professional money advice.

Found this article useful? Read also Investing Basics for Families, Investment Strategies for Households and Tax Effective Investments for Families.

References:

Koch, David. Kochie’s 101 Ways to Survive 2009. Melbourne: Wilkinson Publishing, 2009.

Koch, David. Kochie’s Guide to Keeping it Real. New South Wales: Pier 9, 2006.

The copyright of the article Household Investing Tips in Family Finances is owned by Wei Yin Wong. Permission to republish Household Investing Tips in print or online must be granted by the author in writing.

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