Before you invest: six foundations worth checking

Begin with a purpose

Before downloading a broker app, think about what you want the money to do. Saving for next year’s rent is a different job from investing for retirement in 30 years. The date you might need the money matters as much as the investment itself.

You do not need a perfect life plan. A simple distinction between short-term needs, medium-term goals and long-term goals can already prevent expensive mistakes.

Create room for the unexpected

Unexpected bills, job changes and family needs do not arrive on a convenient schedule. A separate cash buffer can reduce the chance you have to sell an investment during a market fall. The right amount varies with household stability, expenses and access to other resources.

MoneySmart explains how an emergency fund works and provides a useful starting point for thinking about one.

Look at high-interest debt

A credit card or other high-interest loan may cost far more, with much greater certainty, than the return you might earn from investing. Understand the interest rate, fees and terms of any debt before committing spare cash to investments.

This is not a one-size-fits-all rule about the order to do things. It is a reminder that borrowing costs are part of your complete financial picture.

Know your time horizon and capacity for loss

Market prices fluctuate. A diversified portfolio can still lose a substantial amount over a short period. If an investment fell while you needed the cash, would you be able to wait or would you have to sell?

• When might you need to access the money?
• How would a loss affect essential spending?
• Would volatility change your behaviour?
• Do you understand the product and the costs?

Understand your next step

Learning what shares, exchange-traded funds and brokerage fees actually are is often more useful than hunting for a “best” investment. Continue through our beginner library, compare ideas with reputable independent sources, and seek appropriately licensed advice if you need a recommendation tailored to your circumstances.

A practical thought experiment

Imagine two savings goals: paying a course fee in six months and building retirement savings over several decades. Both are worthwhile, but the consequences of a temporary market decline are very different. Losing access to the first amount at the wrong moment could disrupt an important commitment; the second goal may offer more flexibility in when the money is needed.

This example does not establish where either amount should be held. It shows why a decision should begin with what money must do in your life, not with what an investment advertisement promises.

Questions to write down

• What is the goal and its approximate date?
• What other financial commitments compete for this money?
• How much financial uncertainty could I absorb without disrupting essentials?
• Where will I find official information about the products I research?
• Would personalised financial or tax advice be useful for my circumstances?

Your answers can change. Revisiting them occasionally is a useful part of learning, regardless of whether you decide to invest.