Investments with the best returns over time can be volatile in the short term. So before committing any funds to long-term investment make sure that you have enough cash to meet your short term needs.

• If you have any borrowings other than a mortgage or student loan, pay these off before committing money to long-term investment. In no circumstances should you use balances on high interest credit cards to finance long-term investment.
• Funds that you will probably need to use in the short term should be placed in easy access deposit accounts.
• Funds that probably won’t be needed unless an unexpected emergency occurs should be placed in high yielding fixed term accounts where instant withdrawal is permitted at the cost of a reasonably small interest penalty.
• It is prudent to make sure that you have sufficient borrowing power to raise funds to cover significant, unexpected expenses without having to resort to a forced sale of long-term investments.
• Once your short term needs are covered, allocate as much as you can to long-term investment. This will increase your chance of a comfortable retirement, and you will have a better chance of retiring at a time that suits your convenience.

Making the right choices as early as you can, can have a significant effect on the quality of your life later on. Warren Buffet puts it like this, ‘Do not save what is left after spending, but spend what is left after saving’.

If after assessing your position, you decide that you have funds available that you can afford to set aside for at least five years, then an investment in the stock market will almost certainly provide a better return on capital than any other investment choice.

Next Topic: Understanding Compound Returns