Okay, so you’ve heard about all the fantastic benefits of investing, and you want to get started. Who wouldn’t?! Long-term investing (5-10 years or more) has historically proven to be a near-guaranteed way to build wealth and beat the effects of inflation on our savings.

But wait a second! Best not to rush in head-first; instead take a moment to reflect on whether this is the right time for you, before committing to anything. Investing can be very volatile in the short-term, meaning the value of your investments can go up or down month to month.

The whole idea of investing is that you only dedicate money you DO NOT need; you’re happy to have zero access to it for at least 5 years. So, there are a few things you need to have in place to ensure you don’t run into an unexpected rainy day, forcing you to sell your investments at a potential loss.

So, with that in mind, here are 8 things you must do before investing.

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Create An Effective Budget

First thing’s first, ensure you have a budget (doesn’t need to be anything too fancy); you track your expenses and really hold yourself accountable each month. To be able to invest, you need to know that you are regularly able to stay within budget and are always able to allocate money to your savings and/or investments each month. If you’re only just staying afloat or are in fact losing money each month, then now may not be a great time to begin investing.

This is one of the more ‘boring’ tasks that gets people’s eyes rolling, but it’s truly the foundation that keeps everything else in place. Failing to stay within your means could result in needing to sell some of your investments, likely at a loss, to cover unexpected expenses.

Already a budgeting pro? Then you’re ready for the next steps.

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Build An Emergency Fund

To invest effectively, you need to be able to go 5+ years without touching your investments, even during hard times.

Building an Emergency Fund is crucial, then, so that you have money available for rainy days. It can protect you from financially distressing times, such as: the loss of your job, a medical or dental emergency, replacing broken household appliances, or a vehicle breakdown.

Unsure what an Emergency Fund is or how much you should save? Then check out this post, where I delve into Emergency Funds in more detail.

As a minimum, though, you should aim to save 3 months’ worth of living expenses.

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Pay Off High-Interest Debts

Next, it’s important to ensure you have no high-interest debts remaining. “High-interest” refers to any debts with an interest rate above 10% per year. Though, it is best to pay off any debts with an interest rate of 5% or more before investing.

Most investments return between 4% and 10% per year on average, so it’s more financially beneficial to pay off the high-interest debt first, as the interest rate on this debt is higher than the returns you would get from investing your money. Once these debts are paid off, then it may befinancially beneficial to invest instead.

High interest debts most commonly include:

• Payday Loans
• Credit Cards
• Personal Loans

Unsure on what order you should pay off these debts? There are two efficient ways to do this: the “Avalanche” method or the “Snowball” method. I cover both methods in detail in this post if you want to know more.

Paid off all your high-interest debts already? Fantastic, move onto the next steps!

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Define Your Financial Goals

You’ve solidified your budget; built an Emergency Fund and have paid off your high-interest debts. Perfect! So, what’s next?

The next step is to define your financial and investment goals, both short-term and long-term. Goal setting is massively underrated when it comes to finances; it really does help to keep you motivated, grounded and on-track over a long period of time.

Ask yourself the following:

• Why am I investing? What am I saving for? (House deposit? Early retirement? Savings for your children?)
• How long am I looking to invest for? (Ideally 5+ years!)
• How much can I save/invest per month?
• What realistic return am I aiming for, per year?
• How much would I like to have saved by the end of my investing period?
• How will I achieve these goals, and which forms of investment will I use? (E.g., stocks/shares, bonds, index funds, real estate, etc.)

Write these thoughts and goals down somewhere where you can easily refer back to them; particularly the first question. Remind yourself of this ‘Why?’ regularly to keep you motivated.

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Establish Your Risk Tolerance

Put simply, “risk tolerance” relates to how much you are willing to be unsure about your actions when it comes to investing, and how much money you are willing to lose, in hopes of making gains in the future.

In other words, it’s how large of a bet you are willing to take that something will go up in value over a long period of time, knowing that there is a possibility you could lose money.

While this sounds unsettling and anxiety-inducing, many of us already take financial risks more regularly than we realise. If you play the lottery or purchase scratch cards, you are indeed taking on a lot of financial risk, as you’re saying: “I’m willing to lose 100% of the money I put in, in the hopes that I win something in return”. Thankfully, though, it’s nearly impossible to lose all the money you put in when investing (assuming a diversified portfolio); if you did, it likely means there are bigger things to worry about globally!

However, with investing, there is often more of an emotional element, as you can – in many cases – see your investments go up and down in value in real-time; your risk tolerance will also determine how much of a decline you are willing to accept in the short-term, with the hope that the investment recovers and instead provides a gain in the long-term.

Everyone is different, and as such, each person has their own level of risk tolerance, often depending on their age, financial situation, and their priorities. For example, A young person with no spouse or children may be willing to take on higher-risk, higher-reward investments like stocks or real estate, while someone in retirement may want to focus on lower-risk, lower-reward investments like bonds.

It’s important to understand and establish what your risk tolerance is, before moving onto the next step.

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Learn The Basics Of Investing

As the age-old saying goes:

“Do not try to run before you can walk”

Similarly, it’s important that you do not dive into investing your money before you have taken some time to understand the basics. You don’t need to take any expensive courses or try to become a self-certified economist, but you do need to know what you’re getting into, the options you have in front of you, and their risk/reward ratio.

Most of the investing basics can be found for free online via YouTube or blogs (like Farsight Finance!), and it won’t take you long to get to grips with them.

It’s crucial to ensure you know what it is meant by the following terms, and what they can mean for you (how volatile they are, an estimate of the returns you can expect, etc):

• Index Funds
• ETFs
• Mutual Funds
• Bonds
• Stocks/Shares
• Dividends

Again, you are not expected to become an expert; simply to know enough information to make responsible decisions with your money.

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Choose Your ‘Account’ Type

Depending on your reason for investing, it may be more beneficial to choose one account type over another. So it’s important to know where your money will be sat for the next 5+ years.

For example, if you are aiming to save for a house deposit to purchase a home in 5+ years, then a Lifetime ISA or Lifetime Stocks & Shares ISA may be most suitable. With any Lifetime ISA, you can deposit up to £4,000 per year. The government will then top-up this amount by 25% (up to £1,000 per year) for free. With a Lifetime Stocks & Shares ISA, you get this same benefit, but you can also invest the money into various types of assets, such as index funds/ETFs, bonds, or shares. Moreover, any gains made within these accounts are entirely tax-free.

If you are saving for your child’s future, a Junior ISA is a great choice instead. Any interest, investment income or capital gains made within this account are again entirely tax-free.

Saving for retirement? Then a Lifetime ISA (or Lifetime S&S ISA), a Stocks & Shares ISA or a Self-Invested Personal Pension (SIPP) may be for you; perhaps even a combination of these.

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Choose Your Investing Platform

Lastly, there is one more piece of the puzzle before you are ready to invest. That’s finding and choosing which platform(s) you want to use to invest your money.

There’s a large variety of platforms out there with various fees, so some research is required here to find the best current rates/offers.

Many UK banks now offer their own investment platform which may be a place to start. Outside of this, there are many brokerages whose purpose is to enable the everyday person to begin investing. Examples include Freetrade and Nutmeg.

Don’t like the idea of using a newer investing platform (you may feel like it’s a less secure option)? Then some of the older investing platforms like Hargreaves Lansdown, AJBell or Legal and General are also suited for long-term investors who wish to buy and hold for 10+ years. Their fees are often higher than newer brokerages, but you will have the peace of mind that these are companies who have been around for decades.

And that wraps up this (lengthy) post featuring eight things you need to do before you start investing.

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Where are you on your journey to begin investing? How many of these 8 things have you completed so far? Let me know in the comments!