1. Do you have an emergency fund?
Keep enough cash in an easy-access savings account to cover three to six months of essential spending before you invest. That fund pays for a broken boiler, a car repair or a gap between jobs, so you're never forced to sell investments after a fall to cover a bill.
Work it out from your essentials, not your total spending: rent or mortgage, bills, food, transport, insurance and minimum debt payments. For example, if your essentials come to $1,800 a month, three months is $5,400 and six months is $10,800.
Aim for the higher end if your income is irregular, you're self-employed or other people rely on you. Three months may be enough if you have a stable job and a partner with their own income. Many countries have free, impartial money guidance services, often government-backed, with budgeting tools that help you work out a figure.
2. Have you paid off expensive debt?
Pay off credit cards, overdrafts and other high-interest debt before you invest. The interest you'd save is a certain return, while investment returns are not. If your card charges far more interest than investments are likely to earn, every bit of money you invest instead is costing you.
Suppose you have $3,000 on a credit card at 22% APR. Leave it there for a year and you'd pay roughly $660 in interest. Invest the same $3,000 instead and, if it grew 5% that year, you'd make about $150. Paying the card off leaves you around $500 better off, and that result doesn't depend on the markets.
Not all debt works this way. A mortgage or a low-interest loan doesn't usually need to be cleared before you invest, and in some countries student loans work quite differently from ordinary debt. The rule of thumb is to compare the interest rate on the debt with what you could realistically expect from investments, after fees. Check your own rate on your latest statement.
3. Do you know what you're investing for?
Write down each goal with a rough amount and a date. 'Retire comfortably' is a wish. '$15,000 towards a house deposit in eight years' is a goal you can plan for. Your goals decide how much risk you can take, which account to use and how you'll know whether you're on track.
Different goals often need different pots. Money for a deposit in five years and money for retirement in 30 years shouldn't usually be invested the same way, because one has much less time to recover from a fall.
It also helps to ask whether a goal needs investing at all. If you're saving for something in the next year or two, a savings account is usually the better place for it. Investing makes most sense for goals that are some years away.
- What is it for? Be specific: retirement, a deposit, school fees, a general long-term fund.
- How much will you need? A rough figure is fine. You can refine it later.
- When will you need it? This becomes your time horizon (step 4).
- How flexible is it? Could you wait an extra year or two if markets were down?
4. How long can you leave the money invested?
Only invest money you can leave alone for at least five years. Share prices can fall sharply and take years to recover, so a shorter time frame increases the chance you'll need to sell at a loss. The longer you can wait, the more a portfolio's ups and downs tend to even out.
Five years is a minimum, not a guarantee. Markets have sometimes taken longer than that to get back to a previous high. That's why the amount of risk you take should also fall as your deadline gets closer.
Think about whether you might need some of the money sooner than planned. If there's a real chance, keep that part in savings. Our risk tolerance guide shows how time horizon fits with the other parts of deciding how much risk to take.
5. Are you using pensions and tax-advantaged accounts?
Check you're making use of any workplace pension and tax-advantaged accounts open to you before you put money into an ordinary taxable account. In many countries, pension contributions get tax relief and sometimes employer top-ups, and some savings or investment accounts let growth and income build up with little or no tax.
Which account suits you depends on your tax position, where you live and when you'll need the money. If you're unsure, an authorised financial adviser can help, and free government-backed guidance on pensions is available in many countries.
Workplace pensions
If you're employed, your employer may offer a workplace pension and pay in too, and in some countries it has to. Some employers will pay in more if you do. Turning down that extra is like turning down part of your pay. Your employer or your government's official guidance can tell you the rules on contributions where you live.
Personal pensions
In many countries, money you pay into a pension gets tax relief, so part of what you'd have paid in tax goes into your pension instead. The catch is that you usually can't take the money out until a minimum age set by law. Check the current rules and that age with your country's tax authority or official pension guidance.
Tax-advantaged investment accounts
Some countries offer accounts that let you invest up to a yearly limit without paying tax on growth or income, or with tax deferred until you take money out. Whether you can withdraw freely depends on the account. Limits and rules change from time to time, so check the current figures with your country's tax authority.
6. Do you know what you'll pay in fees?
Add up every cost before you invest: the platform or management fee, the ongoing charges of the funds inside, and any trading, exit or transfer fees. Then turn the total into money terms for your amount. A total of 1% a year on $10,000 is $100, taken whether markets rise or fall.
Fees compound like returns do. Over 20 or 30 years, the gap between a 0.5% and a 1.5% yearly cost can run into many thousands in cash terms. Our investment fees guide has a worked table showing exactly how much.
Ask any provider for a full breakdown of its costs and charges before you commit, read it, and compare it with at least one other provider. For the managed portfolio, every charge is set out on our fees page.
7. Have you decided how much risk you can take?
Decide how big a fall you could live with before you invest, not after. Picture your balance after a bad year in money terms. If a $10,000 investment dropping to $7,500 would make you sell, choose a more cautious mix with fewer shares. Selling after a fall turns a temporary drop into a permanent loss.
Your risk level should reflect what you can afford to lose and how long you have, as well as how you feel. A firm that manages money for you should ask about all three before it does. Answer accurately, even if it means a lower-risk portfolio.
Spreading your money across many investments also helps. It won't stop your portfolio falling when markets fall, but it makes it much less likely that one bad investment will do serious damage. Our diversification guide explains how.
Where does the managed portfolio fit in?
The managed portfolio is a managed investment product from the provider. It can make sense once the first six steps are done and you've decided you want someone else to manage the portfolio. If you still have expensive debt, no emergency fund or a goal less than five years away, it isn't a good fit yet.
It also isn't a replacement for your workplace pension, and you'd need to check with the provider which account types it offers. Read how it works and the risk disclosure before you request a call. There's no deadline and no reason to rush.