Before you invest: a first-time checklist

What should you check before you invest?

Before you invest, check seven things in order: a clear goal with a date, no expensive debt, an emergency fund in place, a one-page plan, money you can leave alone for years, a product you can explain, and a firm you have checked yourself. Each step protects the next, so skipping one weakens the rest.

Work down the list in order. The early steps are less exciting than choosing an investment, but they decide whether you can stay invested when prices fall.

Why do you need a goal and a date before investing?

A goal and a date tell you how much risk the money can carry. Money needed within about five years is usually better kept in savings, because a fall just before you need it may leave no time to recover. Money for goals ten or more years away has more time to ride out bad periods.

'Long term' means little on its own. 'A home deposit in 2031' or 'retirement at 63' gives you something to plan around. Match each pot of money to its own date rather than lumping goals together.

Plan the end as well: as the date comes closer, many people move money gradually into savings so that a late fall can't wreck the goal. The next lesson, how much investment risk you can take, looks at time horizon in more detail.

Should you pay off debt before investing?

Usually, yes, if the debt is expensive. Clearing a credit card, overdraft or high-cost loan gives a certain result: every amount repaid stops interest that would definitely be charged. No investment can promise that. Cheaper, longer debt such as a typical mortgage usually doesn't need clearing first, but keep up every payment.

A sensible order for most people: keep a small starter buffer so the next surprise bill doesn't go straight back on the card, pay at least the minimum on every debt, then put every spare amount towards the debt with the highest interest rate. When it's gone, move that payment to the next one.

Look at the true cost, not only the headline rate: a promotional rate that jumps when the deal ends can change the order. If repayments already feel unmanageable, contact your lenders early and look for a debt advice charity where you live before you think about investing.

How big should your emergency fund be before you invest?

Size your emergency fund from essential spending, not income. Add up what you'd still have to pay if your income stopped, then multiply by the number of months it might take to recover: commonly three to six, more if your income is irregular or others rely on you. Add any large bill you can already see coming.

To find essential spending, take the last three months of bank statements and add up housing, energy, food, transport, insurance, childcare, mobile and broadband, and minimum debt repayments. Divide by three. Then add a monthly share of yearly bills such as insurance renewals. Leave out spending you'd cut in a crisis, such as eating out.

Keep the fund in cash, in a separate easy-access savings account, at a bank covered by your country's deposit protection scheme. It shouldn't be invested or held in crypto: investments can fall in value just when you need the money, often during the same downturn that puts jobs at risk.

If the target feels far away, set a first milestone, such as one month of essentials, and build from there with an automatic transfer on payday.

Illustration only: a fictional household with invented figures. Your own target depends on your spending, your income and who relies on you.

What goes in a one-page financial plan?

A one-page plan lists your monthly take-home income, essential and flexible spending, debts with their interest rates, the emergency fund target and progress, and each goal with an amount and a date. Whatever is left after those is the most you could invest each month. If nothing is left, the plan is telling you to wait.

• Income: take-home pay per month. If it varies, use your lowest typical month.
• Essentials: the monthly figure from your emergency fund sums.
• Flexible spending: eating out, hobbies and subscriptions, at an honest figure rather than an ideal one.
• Debts: each balance, rate and minimum payment, highest rate first.
• Emergency fund: the target, what's saved so far and the monthly transfer.
• Goals: each with an amount, a date and a monthly saving (the amount divided by the months left).
• Long-term money: what's left, if anything, after all of the above. This is the only line that might be invested.

Date each version and review it once a year, or sooner after a big change such as a new job or a move. A small amount for the long term with everything else secure beats a large one with no safety net.

If your employer adds money when you pay into a workplace pension, taking that full contribution usually comes before investing elsewhere. Ask also whether your country offers tax-advantaged accounts for saving or investing: which account you use can matter as much as what you buy.

How much money should you invest at first?

Invest only money you can leave alone for at least five years and could watch fall sharply without changing your plans. That is the 'long-term money' line in your plan, after debts, the emergency fund and near-term goals. Starting with a small amount and adding regularly also lets you learn how a fall feels before much is at stake.

Test the amount in money, not percentages. Picture the sum falling by a third and staying there for two years. If that would force you to sell, borrow or delay a goal, the amount is too large for now. The risk tolerance lesson turns this into a short self-check, with a worked example.

How do you know you understand an investment?

You understand an investment when you can explain, in two or three plain sentences, what it is, how it makes money, what could make it lose money, what it costs each year and how you would get out. If you can't, or you're relying on someone else's confidence, you're not ready to buy it yet.

Read the product's own documents, not a summary from the person selling it. For a fund, that usually means its key information document and factsheet: what it invests in, its risk rating, its costs and how to sell. Two funds with different names can own much the same things, so check the holdings.

Costs deserve their own look, because a charge taken every year adds up whether the investment rises or falls. Our lesson on how investment fees work shows the effect in money, and the ten-question decision check brings everything together when you weigh a specific option.

How do you check who you're paying?

Find the firm on your country's official financial register yourself, by typing the regulator's address rather than following a link. Confirm that the firm may offer that service, that its contact details match what you were given, and that the payment goes to an account in the firm's own name. Never pay a person or a crypto wallet.

Famous names deserve the same check, because fraudsters copy them most. Then give yourself time: never pay because of a deadline, a bonus for acting now or a request to keep quiet. A genuine opportunity will still be there next week.

Our lesson on how to check an investment firm or broker walks through the register step by step, and investment fraud red flags covers the pressure tactics scammers use.

Before you invest: common questions