Which of the following should you do before you start investing?

• A. Invest all your savings immediately
• B. Rely solely on investment returns for daily expenses
• C. Ignore your current debts
• D. Establish an emergency fund

Answer: (D)

Verified step by step guidance

1. Understand the importance of an emergency fund: Before you start investing, it is crucial to establish an emergency fund. This fund acts as a financial safety net to cover unexpected expenses, such as medical emergencies or job loss, without having to liquidate your investments prematurely.
2. Determine the size of your emergency fund: Typically, financial experts recommend saving three to six months' worth of living expenses in your emergency fund. Calculate your monthly expenses, including rent, utilities, groceries, and other essentials, to determine the target amount.
3. Prioritize paying off high-interest debts: Before investing, ensure that you address any high-interest debts, such as credit card balances. Paying off these debts can save you money in the long run and improve your financial stability.
4. Create a budget to allocate funds: Develop a budget that allows you to consistently save for your emergency fund while managing your current expenses. This will help you build the fund over time without compromising your financial obligations.
5. Review your financial situation regularly: Once your emergency fund is established, periodically assess your financial situation to ensure it remains adequate for your needs. Adjust the fund size if your expenses or circumstances change.