Housekeeping: four things to sort before investing
Before investing, get your house in order
Taking risk responsibly involves preparing for the worst: Coronavirus related redundancies and reduced salaries serve as salient reminder of the sinkholes that can unexpectedly open-up and engulf our finances from time to time. By building-in buffers and getting the correct insurance and paperwork done, you will give yourself greater financial peace of mind and reduce the possibility of having to sell investments at inopportune moments to fund and bridge crises.
Here’s four areas we think you should consider:
Clear any expensive debts
First and foremost, clear any expensive debts. Credit cards or other forms of fast credit will charge far more interest in a year than you could possibly hope to achieve in investment returns. Zero those first! And for the same reason, never use credit to fund investments (if you’re struggling with debt, the Money Advice Service has some suggestions).
Create a rainy-day fund
Next, the all-important rainy-day fund. Unforeseen events WILL occur, such as broken boiler or a roof damaged by a storm, or indeed, the next pandemic. This is where savings accounts come into their own as they will hand back a small bit of interest while offering easy access to your cash with very little risk (well, up to £85k – the limit of government protection). Read our article on the different types of savings accounts here. We also explain all the ISA accounts, which includes the Cash ISA, here. As a rule of thumb, you need between 3 – 6 months’ salary, depending on the responsibilities you’re on the hook for.
Sort out insurance
One area a financial adviser will always look at is life cover, as serious illness or death could lead to a nightmarish squeeze on you / your family’s finances.
Your two financial calculations (see here) will have painted an idea of the debts stacked against you, like mortgages, and also the running costs of your life.
Life covers pay out a lump sum and are a good way to protect entire families; decreasing life insurance will also pay out a lump sum, but its cover falls over time in-line with a repayment mortgage; and cover for critical illness / income protection pay out a monthly income in case you get very sick or injured.
There are plenty of comparison websites to help you find the best deal, but broadly, covers become more expensive the older and sicker you are. Make sure you check the details though – your family wouldn’t want any nasty surprises!
Write a will
Our final bit of recommended housekeeping: a will is a legal document that stipulates exactly what happens to your estate when you die. Failing to write a will could lead to it being shared in way you wouldn’t have wanted or chosen, and could lead to higher costs in terms of inheritance tax.
The Money Advice Service offer some guidance in creating a will.