Eight steps to take before you invest

1. Clear your debts

Your first priority should be to use spare cash to pay off outstanding loans, carried-over credit card debts and overdrafts, starting with the debt carrying the highest interest rate.

"If you're paying five to 10% interest, or more, on a debt, it's a gamble as to whether investing the money would produce enough gains to cover it," comments Justin Modray, director of candidmoney.com.

2. Build up a cash cushion

Everyone needs some resources easily accessible in case they lose their job or hit other unforeseen problems.

Investments simply won't do, because of the short-term risks involved: if you needed to get your hands on the money fast and the market has taken a downturn, you could lose capital.

It's recommended that you keep at least three months' income in an easy access savings account.

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3. Look ahead to big one-off costs

Put money aside in a low-risk cash-based account if you anticipate major expenses - school fee deposits, for example - in the next two or three years.

4. Consider life assurance

If you're single and without dependants, there's little point paying for life assurance beyond mortgage-linked cover. However, if you have a family that will need financial support in the event of your death, life assurance is vital.

The typical rule is to take out a policy paying four times your annual take-home pay.

It's not expensive: £100,000 of cover for a 35-year-old, non-smoking man for 20 years is less than £7 a month from AA Insurance Services, according to moneyfacts.co.uk.

It's possible to include critical illness cover, which pays out a lump sum if you suffer a serious illness such as cancer.

5. Think about Income protection

Income protection is important. The Department for Work and Pensions estimates that one in seven people in the UK will have to take six months or more off work because of illness or injury during their working life.

It's designed to provide a tax-free regular income (typically around 50 to 65% of your normal pay), until retirement age if necessary, if you are unable to work because of poor health.

This cover is particularly important if your family relies on your income and for self-employed people, who receive no sick pay.

Prices are lower if you are happy to limit the payouts to a maximum period (usually a year). British Insurance will pay £1,000 a month to a 35-year-old woman for a monthly premium of £12.50.

If you want benefits to run to retirement if necessary, Shepherds Friendly charges £29.90 a month for the same payout, according to comparethemarket.com.

6. Build up your pension pot

It makes sense to save regularly into a pension plan for retirement, partly because you cannot dip into it in the meantime, but mainly because of the generous tax breaks attached.

For all except the highest earners, the government gives full tax relief on pension contributions.

This means that for every £100 paid into the pot, basic-rate taxpayers contribute £80 and higher-rate taxpayers pay only £60, with the balance paid by the state. If there is an occupational scheme on offer to which your employer also contributes, go for that.

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7. Provide for your children

If your child qualifies for a child trust fund (CTF), you can save up to £1,200 a year in one tax-free on their behalf. However, it must be handed over to the child at the age of 18.

If you're unhappy with that idea, or your kids are too old to qualify (CTFs are only available to children born since September 2002), set up a regular savings investment for them.

Those designed for children typically allow small monthly payments (as little as £25 for the Witan and Foreign & Colonial investment trusts, for example), but you can use any fund that accepts monthly contributions.

8. Use your ISA allowance

Finally, make use of your ISA allowance each year (£7,200 for the under-50s this year and £10,200 from 6 April). You pay no further tax on the proceeds of ISA investments and don't have to declare them on your tax return.

If you do one thing this month: Look at your pension options if you're about to turn 50 or are between the ages of 50 and 54.

If you reach 50 before 6 April and plan to take pension benefits in the next five years, you should act now. From 6 April, the minimum age at which you can start receiving a personal or company pension will rise from 50 to 55.

Those aged 50-54 who are looking to draw pension benefits or even just take the tax-free lump sum should do so now or be forced to wait until they are 55.

So put the wheels in motion now - before it's too late.

This article was originally published in Money Observer - Moneywise's sister publication - in March 2010