Are you financially ready?
If you’re not sure whether you’re financially ready to begin investing, this basic checklist may help you to decide:
- Are you regularly earning more money than you’re spending?
- Do you have some ‘spare cash’ saved up that you won’t need for a while?
- Have you done a budget to see how much you could regularly contribute?
- Do you understand the different costs involved, as well as the money you might lose?
- Is your debt minimal?
Patience and consistency can be more important to success than a large amount of money when you first start investing.
Costs and tax
Different types of investments have different costs, but most do incur some sort of transaction fee, commission or other expenses. It’s important to understand the costs, as these will impact how much money you actually make from an investment.
For example, when you buy or sell a house or unit, you may also have costs to pay like real estate agent commission, property inspections and stamp duty.
When you buy or sell shares, you will have to pay a brokerage fee, in addition to the amount of money you spend on the shares themselves. Each individual transaction incurs brokerage, meaning if you buy shares in four different companies, you will have to pay four different lots of brokerage fees.
Similarly, if you buy shares in a company and then sell those shares two years later, you would pay a brokerage fee on both occasions.
This means the less you invest, the higher the costs will be as a percentage of your total investment. For example:
- If brokerage costs you $19.95 and you buy $600 of shares, brokerage will represent just over 3.3% of your investment.
- If brokerage costs you $19.95 and you buy $5,000 of shares, brokerage will represent only 0.4% of your investment.
It also means your shares need to grow enough in value between when you buy and sell them to at least cover the cost of brokerage before you begin to make a profit. Again, the less you invest, the more your shares will need to grow in value to cover these costs.
Additionally, money you make through investing may be subject to tax, which can also decrease your real rate of return.