Here are four crucial actions to put in place before you devote an evening trying to nail the best investments.
1. Financial roadmap
Before you make any investing decision, sit down and take an honest look at your entire financial situation - especially if you've never made a financial plan before. This will mean getting a grip on your spending pattern and cash flow, possibly enabling you to identify where you can spend less and invest more.
An independent financial planner will do a cash-flow analysis as part of their service. However, you can get a free cash-flow statement from the Institute of Financial Planning's website (www.financialplanning.org.uk) that offers a free link to Prestwood Software's Truth Lite system. By entering details of your income, outgoings, assets and liabilities into this useful online tool, you can build an accurate measure of your net worth and current financial situation. Then enter your projected future income and expenditure to build up a picture of the life you want to enjoy in years to come. You'll need to set aside 30 minutes to do this.
2. Insurance
Financial planners will want to make sure that you are insured against catastrophe - ie, death or job loss. However, they should also tell you not to buy life insurance unless someone else depends on your salary. Children do not need life insurance, university students (unless they have offspring) do not need life insurance, single adults do not need life insurance, married adults without children who both work do not usually need life insurance, and retired people generally do not need life insurance.
The one thing you do need is to insure your working ability because that is your capital from which you will make investments. If you are unable to work because of illness or accident, then you may incur additional costs through your healthcare. However, before rushing out to buy an income protection insurance policy, check what insurance your employer provides in the event of your being unable to work through ill-health.
3. Emergency fund
It's important you have access to some cash immediately - if all of your savings are tied up in long-term investments, what will you do when the boiler/car/washing machine breaks down? Plus, careers for life are a thing of the past and younger adults are prone to job-hopping, so it is likely that you may be between jobs for one reason or another sometime during your working life. However, it's also important to note that cash is subject to inflation risk, so you don't want to hold too much cash. Most advisers recommend that you hold three to six months' expenditure as a minimum in an easily accessible account. An easy access cash individual savings account (Isa) can work well for this portion of your portfolio.
4. Consider paying off your debts (including your mortgage)
The interest you pay on a credit card or loan could easily wipe out any gain you make on an investment. Make sure your priorities are in the right order and pay off any immediate debts first.
We often see readers featured in our Portfolio Clinic who are holding a large amount of cash in their investment portfolio but also have a large mortgage on their house. If this applies to you then think carefully about what you are trying to achieve. Here's a question to focus your thinking: if you didn't have a mortgage and you had no spare cash, would you mortgage your home in order to invest in equities?
In a low interest and low inflation environment, you may think that you can do better by investing your money than paying off the mortgage. Plus, there is one definite area in which it makes better financial sense to contribute rather than pay into a mortgage and that is paying into a pension scheme, where you will still get income tax relief on your contributions. If you paid off your mortgage instead, you would miss out on the tax relief.
Others worry about the inaccessibility of pensions - your money is locked up until you are at least 55. In the extreme, owning your house outright is insurance against losing your job.
There are no right answers here, with even the experts disagreeing, but it's worth forming a view on this.
