This week I had another great “Ask Tash” question from our Women with Cents community:
“What is the best thing I can do with $40k? It’s always difficult to make ends meet, but I’m looking to get ahead. What do you suggest is the best way to use it?”
Ok, right off the bat I would ask you these four questions:
1. Do you have any emergency savings?
2. Do you have income protection insurance?
3. Do you have any non-deductible debt to get rid of?
4. Could you afford interest rates on your home loan at 8%?
Before we can get you started on the exciting path of investing, it is important to get the basics right first.
So. If you don’t have an emergency fund, I would put three months of living expenses in either a mortgage offset account or high interest savings account. If you don’t have income protection insurance I would get that sorted ASAP. If you have credit card debt, a car or a personal loan, I would pay those off. And finally, I would also suggest that if you have a mortgage, make sure you would be able to afford to make the repayments at around 8% interest if your savings were tied up – if not, I would use the money to get the mortgage to a level you could afford to repay when rates go up.
Then you might start to think about investment!
We all know there is no silver bullet when it comes to investing (or we’d all be millionaires I’m sure!) but there are three simple questions that you should answer to help you decide where to invest, whether you have $2k, $40k, or $1 million.
Question 1: What do you want?
Ahead of any investment decisions, ask yourself what exactly do you want from that investment? Do you want stability? Do you want capital growth (or “profit”) when you sell (for example a property or shares that increase in value)? Or do you want to receive a regular income over time (like dividends from shares or positive cash flow from property)? Make sure you’re clear on this before you make your move.
Question 2: When do you want it?
Secondly, you need to know what your investment timeframe is. Do you need to be able to access the cash quickly and with little notice, at a particular point in time or can you afford to wait for the right time to sell?
Having a good idea of your timeframe ahead of making the investment allows you to be smarter about where you should put your money to get the best “bang for your buck”!
Let me give you an example.
Imagine you need to settle an off-the-plan property purchase in 18 months. You have the cash now, and you want to invest it in the short term. What do you think you might need from that short-term investment? Stability! So putting your money in a volatile investment space like the stock market might not be the right investment choice for you and could result in your losing money if you are forced to sell at the wrong time!
Question 3: How far will you go to get it?
Investment is a balancing act – with risk on one side of the equation and reward on the other. So you need to decide how much risk you are willing to take on. Are you willing to risk all or part of your savings to aim for a higher return, or are you more cautious and focused on a smaller and steady reward? Even more importantly, be sure to consider how much risk you can actually AFFORD to take on.
Consider getting some advice…
It might be useful for you to visit an adviser or stock broker for advice before diving into investing head first. Or if you prefer a more DIY approach, look at purchasing a subscription to a known research source such as the Barefoot Investor (Scott Pape).
I hope this helps!
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The information provided by Women with Cents is general in nature. It doesn’t take into account your objectives, personal financial situation or needs. Think of it as educational material in which to help you make more-informed decisions. We recommend you obtain financial, tax and credit advice specific to your situation before making any investments or financial decisions.
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