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5 steps for beginners to start investing their money

If you have started saving and want to start the year by investing your money, it may seem hard to figure out what to do.

If you have started saving and want to start the year by investing your money, it may seem hard to figure out what to do.

Rather than just following friends or family into unit trusts or insurance, there are fundamental steps for investing that can help put you on the right track towards achieving your goals.

The decision to invest is an excellent first step, and starting early gives you more time to earn more from your investments.

A 25-year-old who saves S$50 a month and earns 5 per cent a year from investments would have more than S$57,000 by the time they turn 60, whereas starting when you are 35 gives you barely more than half that amount.

As you start investing, five steps are essential.

REASON FOR INVESTMENT

First, identify your goals and how much you need for them.

Investing can help you reach financial targets such as paying for your children’s education or building a nest egg for retirement.

As Forbes contributor Jeff Rose puts it, think of the money you earn as a tool that you can use to create the life and lifestyle you want via smart choices regarding spending, savings and investing.

MONEY FOR INVESTMENT

Second, figure out how much money you must invest each month to achieve your goal.

You can use online calculators such as the Central Provident Fund’s savings calculator on its website to work out the amount.

Then, decide how to save enough to make your monthly investment. Rather than just looking at how much you are saving now, start by assessing your financial situation and developing a budget that includes the amount you need to save.

If you don’t seem to have enough money, figure out what to change. While you cannot eliminate expenses such as utility bills or food, and you will need to make mortgage or insurance payments, you can reduce other expenses.

TYPE AND RISK OF INVESTMENT

Next, figure out the type of investment you want to make and how much risk you are willing to take.

There are literally hundreds of things in which you can invest, from stocks and bonds to art and gold. When you are starting out though, it is better to make simpler selections such as stocks or bonds.

Stocks can have a higher return in the long run, yet they have high volatility in the short term. Bonds are designed to create a steady stream of income, though they can also be volatile if interest rates change.

While it may not sound like an investment, paying off credit cards or loans that can cost 28 per cent per year usually gives you a better return than investing in shares or bonds.

GET INTO THE RING

Finally, after all the planning, you have to start investing before you see any results.

While many people traditionally put their money into unit trusts or insurance policies, these may come with initial fees that can be 5 per cent of your investments and with high annual expenses.

Investing directly in shares and bonds, or indirectly through exchange-traded funds (ETFs), can be less costly and give an equal or better return.

If you are an experienced investor and decide to pick stocks or bonds directly, be sure to diversify your investments among various types of stocks and bonds. As brokerage firm Schwab said, “a mix of investment types can help balance risk and potential gain”.

If you have less knowledge of investments, you can buy ETFs that act as index funds for stock or bond markets. As Wealthsimple co-founder Michael Katchen told CNBC, less experienced investors should not pick stocks. “You may think you can be the next Warren Buffett. Chances are pretty good you won’t be. Buy index funds, giving you about the same returns as that part of market,” he advised.

If you lack the time or expertise to select and monitor investments, you can use a “robo-advisor” such as Stashaway or Smartly that helps allocate your funds. These robo-advisors use information from online questionnaires to offer a personalised investment portfolio of ETFs and also have online resources such as Stashaway’s How Investing Works.

Another alternative is a service such as POSB’s Invest-Saver, which allows you to invest automatically every month in bond or stock ETFs,

To make sure you keep track of your activities, automate your investments so that you save consistently and do regular checks on your investments.

LEARN AND IMPROVE

To improve your investing capabilities and potentially earn more, consider taking the time to learn more about investing. There are plenty of options.

One is to pick up books from the National Library and read about investing.

Another is to attend seminars that teach you the basics. The Singapore Exchange hosts investment seminars, for instance, and the Securities Investors Association (Singapore) offers talks and online tools.

You can also take courses for free, such as Personal Finance on online platform EduX, or use your SkillsFuture credits to take courses, such as Investing Primer.

Making a resolution to invest and following through will start you on your way to financial security. While it may seem difficult to put money aside, starting to invest now can bring you a far better financial future.

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