Chapter 1: Am I ready to start investing?

Feel like you are all ready to dive into the world of investing? Before we jump into discussing how to read financial statements, form investment strategies, and all that fancy stuff, there is a basic but important question to address first:

Are your finances in order?

This is important because to be investing without having your finances sorted out is like building a house without a sound foundation. Every high-interest debt or unexpected big-ticket expense will cause the house to sway, and even risk collapse.

Use the following list as a way to check your investment-readiness:

1. Take control of your personal cashflow

To invest, you need money, so the very first thing is to ensure that you will have a positive cashflow on a regular basis.

1. First, list all your recurring income sources.
2. Next, look at how much you spent in the last year, and project your expenses for the next 12 months.
3. Do you have sufficiently more income than expenses?

If you don’t, you will need to take a harder look at what expenses can be reduced or cut out, starting from the largest one.

Do you really need a car?
Do you really need to upgrade your phone?
Do you really need to eat at that fancy restaurant or cafe that everyone is posting about on Instagram?

Reducing expenses is the easiest way to immediately improve your cashflow. However, to significantly improve your cashflow, you will need to find other ways to increase your income.

After all, there are only so many expenses that you can reduce but there is no real limit to how much income you can increase.

Some things to consider: upgrade your skills so that you will be eligible for a promotion or a better paying job. Find a side hustle or start a business on the side. Whatever it is, search for that something that will work best for you.

2. Pay off high interest debts

High interest debts are bad. Very bad. As far as possible, you should avoid having them in the first place. But if you do have them, your priority should be to pay them off as soon as possible.

What is considered a high interest debt? It is basically any debt that has a higher interest rate than the expected return on any of your investments.

For example, if you have:

• a fixed deposit of $5,000 with an annual rate of 1%, and
• a personal loan of $10,000 with an interest rate of 5%

What you should be doing is to withdraw the entire fixed deposit to pay off the personal loan.

You should repeat this process until you do not have any more high interest debts outstanding.

Typical high interest debts are credit card loans, personal loans, renovation loans, and student loans (except CPF education scheme).

3. Ensure sufficient insurance coverage

Due to personal experience, I am a strong believer of insurance. However, I want to point out that there is a difference between pure insurance and investment-linked insurance.

The investor in me prefers to buy only pure insurance. I would prefer not to buy investment-link insurance as I like to invest my own money.

Personally, I believe one should minimally have the following:

• Health Insurance to cover hospital and surgical bills when you fall sick.
• Term Insurance with TPD and Critical illness coverage to cover expenses when unfortunate events happen to you. This is especially important if you are the breadwinner.
• Personal Accident Insurance to cover expenses when an accident happens to you.

In addition, consider sufficient coverage not just for yourself but also for your loved ones.

There are of course many other types of insurances. While it is important to get yourself sufficiently covered, I would personally stay away from investment-linked products especially if you intend to start investing.

The main reason is because you are likely to get better returns simply by investing the difference in premiums (e.g. between Whole Life Insurance and Term Insurance) regularly into index ETFs such as ES3, SPY, and similar.

Note: The opinions stated above are solely mine and do not constitute as financial advice. Please contact your trusted insurance agent to receive financial advice for your unique situation. If you do not have one, I heartily recommend my trusted insurance agent (also my army buddy). You can also get complimentary Friend of StocksCafe membership if you decide to purchase your insurance coverage from him.

4. Set up an emergency fund

While insurance can help to cover many unexpected events, there are yet others that it does not cover (or at least not fully).

For instance, losing your job (not due to accident, disability, or illness), a medical emergency (hospitalization insurance these days requires a minimum co-payment of SGD3,500 or 5% of the bill, whichever is higher), etc.

Therefore, it is prudent to put aside some emergency funds so that you do not have to take up high interest debts when unexpected events happen.

As for how much to set aside, many recommend 3-6 months of your living expenses. I do think that is a good start. It should be an amount that allows you to sleep well at night. (In the event that you are someone who sleeps well even if you have $0 set aside, then it is highly recommended to at least have 3 months worth of living expenses put aside.)

The next important question is where to store these emergency funds. The two most important considerations are accessibility and risk.

We want to be able to access the money within days, if not hours. We also want the money to hold its value irregardless of what is happening in the world. A bonus would be if it gives decent returns.

Here is an article sharing the options we have in Singapore apart from savings account and fixed deposits. Personally, I currently distribute my emergency funds in SingLife, SSB, and my savings account.

What’s next?

If you have all the points above accounted for, congratulations! It seems like you are well set and ready for investing.

Read on to find out how to get started on building your own investment plan!