Am I ready to invest? Your financial fitness checklist

Jason Prowd  |  05 April 2018  |  8 min read

Key points:
  • Investing is easier than you think
  • But there are a few things you should get in order before diving in
  • Here’s a 5 step approach to getting started

For too many of us, investing is on the to-do list for ‘some time in the future’. I get it. It’s boring. And complicated. And boring. Still, it doesn’t have to be. Here’s how to get started.

1. Get a clear view of your personal finances

Before investing, it’s essential to have a handle on your income and expenses so you can get an overview of where your money goes. Follow these steps to create your budget, if you haven’t got one already:

Track your spending

Capture your day-to-day spending habits as well as regular monthly outgoings like bills, rent or mortgage, insurance, groceries and entertainment. There are plenty of tools available to help you (Pocketbook is awesome, for example), and the longer you do so, the better your visibility will be.

Figure out your income

What do you make in a week, month, year? Find out how much you earn and, therefore, how much you can put towards achieving your financial goals. If your income fluctuates, or if you’re self-employed, average out your monthly income using your most recent tax return.

Create a budget spreadsheet

It doesn’t have to be fancy – just work out how much you spend and on what and remember to include an entry for money that’s earmarked for savings. Some spending – like groceries or clothes shopping – might be variable, so use your previous spending as a guide.

And that’s it! Having a budget doesn’t mean you have to live frugally, it just means getting a clear view of where your money goes. If you want to achieve your financial goals sooner, you may have to make some adjustments, and that’s where the next step comes in.

2. Follow the 50/20/30 rule

Have you heard of the 50/20/30 rule? It’s super simple and super effective way to check if your budget is on track, and course-correct if needed.

Here’s how it works:

Break down your income into three buckets.

  • 50% of your income goes on non-negotiable living expenses: rent or mortgage, insurance, utilities, groceries and transport
  • 20% is for achieving your financial goals, whether that’s paying off debt, saving for a house or to put towards retirement.
  • 30% is for fun stuff – life would be pretty dull without going to the cinema, eating out, or holidays.

If this sounds like a lot of calculations, you can automate by setting up separate accounts and creating direct debits. That way, as soon as your pay-cheque hits, your fun money goes into a dedicated account with a specific card, and so on.

The best part of 50/20/30 rule is that it doesn’t have to be rigid. If you’ve got $2,000 a week in take-home pay, but your expenses come to $750, you could divert the remaining $250 from the 50% category into the financial goals category to bump up your savings plan. Your ideal breakdown might then look more like 38/32/30 (it’s just a lot less catchy). Likewise, you can readjust if your circumstances change.

It’s also a good idea to decide ahead of time what you might do with windfalls, like a bonus at work or the cash from selling something on eBay. You might divide it along 50/20/30 lines, or you could decide in advance to put it towards securing your financial future.

3. Pay off expensive debt

Now it’s time to move on to tackling expensive debt. We’re not talking about your HECS/HELP debt or mortgage (provided it’s in hand and you’re not struggling to make repayments). The kind of debt we mean is credit card or similar debt that costs a significant amount to pay off because of high interest rates and fees.

If you’ve got a few of Australia’s 16.7 million credit cards in your wallet, you might also own a slice of the $32,521,273,000 (and counting) in debt that, according to comparison site Finder, is currently accruing interest. Yep, it’s a big problem.

Why do I have to pay off credit card debt before investing?

If, like the average Australian, you pay $700 per year for a $4,200 credit card debt; and earn, let’s say $500 per year in returns on a $10,000 investment, you’re actually losing money. So it pays to neutralise expensive debt first. Once you’re free of this obligation, you can put your newly freed-up cash towards investments.

How do I pay off credit card debt effectively?

First, if you still regularly use your cards, stop using them for a while so that you’re not still adding to the debt pile. Consider measures like reducing your credit limit in order to keep a lid on spending for the future.

Next, call your bank or lender and ask them about balance transfer, consolidation and refinancing options. You may be able to consolidate your debt with a more manageable interest rate via a bank loan, giving you some breathing space to catch up and pay down the debt, reducing the interest as you go and paying less in fees.

However, this isn’t the right solution for everyone and it will depend on your financial situation and the kind of debt you’re paying off. ASIC offers an in-depth guide to deciding what’s best for you, along with resources such as free financial counselling.

Put your savings towards paying off your debt. It might feel counterintuitive, but if you’re only earning small amount of interest on your savings, versus a significant chunk of interest on your debt, it makes sense to pull out a chunk to get rid of your debt.

Finally, make a repayment plan that you can stick to. That way, you can get to the light at the end of that tunnel much sooner than you might otherwise, and start investing your cash instead of throwing it away on servicing debt.

4. Build your emergency fund

Depending on your investment strategy, you’re likely going to lock your cash away for some time to take advantage of market growth. Ideally, you won’t touch your investment until it comes time to sell your shares in order to buy a house, for example.

This means that in case of any major unforeseen circumstances – like a sudden illness, losing a job or an unexpected tax bill – you need a good savings buffer that you can fall back on. Even if you never need to put it towards an emergency, the peace of mind it offers is unbeatable. It can also take some time to release funds from an investment portfolio, so don’t be tempted to invest your emergency stash.

Most personal finance experts suggest anywhere between three and six months’ worth of monthly expenditure is a good range for an emergency fund, so take a look at your budget and calculate what 3-6 months in cash looks like for you.

Even starting small and putting away $5/week will quickly start to add up until you have a healthy buffer of ready money.

5. Start investing!

Once you have your financial house in order, you can start investing with confidence. And it’s never been easier. The kind of portfolio you choose will differ depending on whether you’re growing your house deposit, putting aside a lump sum or investing for retirement, so make sure you do plenty of investment research to find out what profile will suit your needs.

Making decisions about which investments to choose is incredibly daunting – not to mention time-consuming and risky. For 30+ years Morningstar has helped people, just like you, tackle investing with confidence. If you want to do it yourself we offer research, data and tools to make it as easy as possible, or if you’d prefer to pick a trusted partner we offer ready-made investment portfolios.

Wrap up

It’s easy to drift. Don’t let ‘someday’ never happen. Follow our simple 5-step financial health checklist, and start making progress today.


Jason Prowd leads Morningstar Next: ready-made investment portfolios.

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© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment. Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.

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