10 Things You Must Do Before Investing
People are often excited about the opportunity to get a good return on their money by investing, so as soon as they have some money, they are ready to invest. They want money to work for them, which is understandable. But not everyone is ready to intervene.
This post was originally published on The Simple Dollar .
Over the years, I’ve answered literally thousands of reader questions in The Simple Dollar’s weekly Reader Mailbag articles (these great Q&A appear every Monday morning), and many of those questions are investment-related.
However, not everyone is in a financial situation where it makes sense to invest in something more risky than a savings account or a ready-made retirement plan. People just see the numbers that the rising stock market is showing and want to invest all their money in them, or they hear some apocalyptic wannabe guru tell them to invest in gold and they are ready to start saving their money. Often these are people who are not financially ready to invest and do not have the mindset or knowledge to make it work.
Make no mistake, though: the foundation you need to invest is something that anyone can achieve with some time and effort. It just takes a little time, a little learning, and a little self-esteem.
Here are 10 things you should really do before you even consider investing in anything other than a savings account or retirement plan.
1. Your net worth should become the main number of personal finances that you care about
First of all, what is “net worth”? Net Worth simply means the total value of everything you own – your home, your car, any valuables that can be easily resold, and your checking account balances, savings accounts, and any investments you make – minus the sum of all of your you have debts – mortgages, credit cards, student loans, and so on. So, if I had a $ 100,000 house and a car that I could sell for $ 10,000, but I had $ 50,000 in student loans (and no other debt), my net worth would be 60,000. dollars.
Most of all, you need to focus on this number and how to increase it. There are many ways to do this more: pay off debt, avoid wasting money on stupid or useless things, increase your income, and, yes, invest.
This may seem obvious, but it is not. Earlier in my financial life, my main focus was on the checking account balance . Did I have enough to make ends meet for a month? How much money do I have left to just spend on whatever comes to mind?
The best way to summarize the transition is that focusing on the checking account is a very short-term perspective, while focusing on equity is definitely a long-term perspective. If you don’t have a long-term perspective, you shouldn’t invest, and if you think your checking account balance is more important and convincing than your equity, you don’t have a long-term perspective yet. …
2. You need to pay off all your credit cards and other debts with high interest rates.
If you have debts at high interest rates – say, an interest rate of 8% – there is nothing better than you can manage your money than pay off that debt. There is no investment that offers anything that comes close to stable long-term profitability that exceeds the amount you will save from paying off your credit cards.
Think of it this way: Making an additional payment on a credit card at a 15% interest rate is functionally similar to a 15% annual after-tax investment. If you pay $ 100 of that balance, it will be $ 15 in interest, which you do not need to pay every year until the card is redeemed. There is no investment that could even come close to this with any consistency.
Not only that, paying off your credit card will have an immediate positive impact on your net worth, and it will make your net worth start to rise steadily because it is not held back by interest payments and finance fees.
Not only that , getting rid of debt means fewer monthly bills, which means you immediately have more money to invest in than ever before.
It’s simple: if you have high interest debt, you should pay it off as your highest priority, far more important than any investment thought. Not only will they offer you a higher rate of return than any investment, but paying them off will quickly improve your net worth and that will improve your monthly cash flow. This is your first step. Take it on yourself.
3. You need to break most of your worst personal spending habits.
When I look at my finances every month, I tend to look at them as a pile of income, from which I have expenses that are deducted from that income. There is a much smaller pile left. I call this the “gap” – the difference between my income and my expenses. This “gap” is money that I can use to invest. Naturally, I want this “gap” to become larger, so that I have more investment, which means that I can reach my goals sooner than before!
When it comes down to it, there are actually two ways to effectively widen your gap. You can spend less money or earn more . I could write endlessly about methods for making more money – getting better jobs, raising wages, starting a business – but I’m really going to focus on the expenditure side of the equation because that’s something you can take immediate action on right now and see results. almost immediately.
The fact of the matter is that most people immediately get a bad taste in their mouth when they think about cutting their costs. And they shouldn’t . The reason people get this kind of backlash is because they initially think about the costs they care about most and don’t want to cut them. They think about money spent on slightly extravagant dinners with good friends. They think about the last hobby item they bought and that they really liked. The idea of cutting these things out seems awful.
And this is awful. These are not the things you should cut out.
You should cut out things that are easily forgotten, purchases that you will not remember in a day, things that are just quietly bought and quickly forgotten. Drink in the mini market. An additional item thrown into a cart at a grocery store. A digital product was bought by accident, once enjoyed, and then forgotten. Latte is consumed in the morning without hesitation or pleasure. These are the things that you should cut out, the ones that you won’t remember a day after you spend them.
Watch out for these things. Be on the lookout for them. When you see that you are going to mindlessly spend money on something that doesn’t really matter, stop yourself. Don’t waste this money. Get rid of this purchase from your life. Focus on getting rid of the routine that led you to your rash purchase.
Do this throughout your life and you will find that you spend a lot less money on unimportant things, which frees up a lot more money for investment.
4. You need to create an emergency fund.
Whatever one may say, but life sometimes interferes in the most conceived plans. You may have a great investment plan, but what if you lose your job? What if you get sick? What if your car breaks down?
In such situations, many people turn to credit cards, but credit cards are not the best solution . They don’t help you with identity theft problems at all. If you are in financial difficulty, banks can sometimes cancel your cards. Not only that, even if all goes well, you still have new debt that could frustrate your plans.
This is why I encourage anyone who invests to have a healthy emergency cash fund tucked away somewhere in a savings account. This is done solely so that life circumstances do not interfere with your big financial plans.
I am an advocate of what I call an “eternal” emergency fund. Create an online savings account at any online bank of your choice (I love Ally and Capital One 360) and then set up an automatic weekly transfer from your main check to that account for a small amount that won’t kill your budget but will grow enough quickly.
Then forget about it. Let your money grow over time. Then, when you need emergency money – job loss or whatever – transfer the money back to your check. I recommend that you never disable transmission; if you find that the balance is getting too high for your taste, withdraw some money from the account and invest it.
I personally use this system and it works great.
5. You need to figure out what your big goals in life are.
One of the key principles of investing is never investing money without a goal. There are many reasons for this, but the biggest one is that, without having a specific goal in mind, you cannot really estimate your time frame for investing and what kind of risk you are willing to take on, and both of these questions are vital issues when it comes to investing.
Take the stock market, for example. It is highly volatile, which means there is significant short-term risk of investing in the stock market. However, over the long term – in other words, decades – the stock market tends to tend towards a fairly stable average annual return of 7%. It only takes a long time for stability.
Thus, if you have a short-term goal, it doesn’t make sense to invest in the stock market. However, if you are investing for the long term, this might be a great option for you.
All of this thinking should start with your personal goals. Why are you investing? What do you hope to do with this money? Are you hoping to become financially independent and live off the profit? This is a long-term goal, so investing in stocks might make sense. On the other hand, you may be investing in buying or building a home in a few years from now. In such a case, investing in stocks is probably not a good idea, as you will need the money soon enough.
What’s your goal? Why are you doing it? Find out before investing a dime.
6. You need your spouse to agree with your plans
If you are married, any investment plan you accept should be fully discussed with your spouse. This discussion should cover at least three key points.
First, what is the purpose? Why exactly this investment plan will be implemented? What do we hope to achieve?
Second, what’s the plan? How exactly do we invest to achieve this goal? Does an investment choice make sense? Where are the accounts and whose name is on them?
Finally, do we both agree on this? Do we both value the goal? Does the plan align with our values and at the same time achieve the goal?
If you do not have this conversation with your spouse before you start investing, you are asking for troubles in the future, problems that can begin as soon as your spouse notices that the money is disappearing in the investment account.
7. You need a good understanding of your investment opportunities.
Another important step before investing is to find out what investment options are available to you and how to interpret them. Do you know the basics of what stocks, bonds, mutual funds, ETFs, index funds, precious metals, and real estate are? Do you know how to compare two identical investments with each other? You will need these skills before you start investing.
If you are unsure about this, I highly recommend grabbing an investment book and reading it in full before taking any investment steps at all. My personal recommendation for a really good all-in-one investment book is The Bogleheads Investment Guide by Larimore , Lindauer, and Leboeuf. It is an impressive one-volume book about investing in how it links real-world problems and goals to investment options and explains how different options work and respond to these different challenges and goals.
Even if you plan to have your investment advisor invest, you still need to take the time to figure out where your money will be invested. Just trusting it to someone else is usually a bad move.
8. You need a bank that handles online banking and automatic transfers with ease.
This should be a given for most people today, but it needs to be mentioned. Before you start investing, your bank must be equipped to simplify online banking and easily set up automatic transfers to and from the bank. If your bank does not offer these services, look to another bank .
The reality is that most banks today offer these things. Today, reliable online banking has become almost the standard, as have automatic transfers to and from checking accounts. Banks that do not offer these features are deliberately obsolete.
Why are these features so important? To get started, you will need to make automatic transfers if you want to set up any kind of regular investment plan. Automation is a big key to investing success – you want your plan to mostly run on autopilot. You will also want to be able to check regularly and make sure that money is being transferred from your accounts, for which you will need online banking to make it convenient.
If your bank makes any of this difficult, start looking for another bank.
9. You need a social circle that is more supportive of sound financial moves than overspending.
While it is absolutely imperative for you to switch to a net worth mindset and a positive attitude towards sound financial moves, you must also remember that you are also heavily influenced by your immediate social circle. If they are not committed to these things, it will be much more difficult for you to make such commitments.
Look at your social circle. Who do you meet most often, especially outside of work, when you have the freedom to make those choices? Are these people financially inclined? Are they making smart choices about spending? Or do they constantly buy new things and talk about their latest purchases?
If you find yourself in a social circle that never takes smart personal finance into account, talks about the latest things all the time, and brags about your latest spending, you should seriously consider changing your social circle. Spend some of your free time in meetings with people with stronger financial prospects. Search for an investment club at Meetup, or simply find out about other friendships with people you may have never interacted with before. Over time, you will build new relationships that will drive positive financial progress.
10. You need a healthy relationship with your wants and desires.
This is the final investment preparation strategy and is very important. You need to firmly control your desires and desires. You need to manage them; they don’t have to control you.
Sometimes it’s inevitable to want something. This is human nature. We see delicious food, delicious wines, items related to our hobbies and interests, and we want them.
The question is, what should we do then? Will we buy this item ASAP? Do we pretend to think about it before buying? Or are we patient with this urge, giving the impulse enough time to fade before deciding to pay attention to it?
Impulse control is one of the most powerful tools an investor can have in their arsenal, and one of the most obvious ways to know if you have it or not is when you are pondering the purchases you want. Do you have the self-control not to succumb to every momentary desire and desire? If so, it will not only be easier for you to get the resources you need to invest, but it will also be easier for you to have the composure needed to withstand the ups and downs of the market.
I am often amazed at how many people want to dive into investing without having the items on this list at hand. They make a mistake whether they want to hear it or not.
Of course, I understand why people want to start investing. They hear all the positive investment reviews on channels like Fox Business Network and CNBC. They are excited about the opportunity to make a big profit for their money. They constantly hear about how the stock market is up 1% today and really want to take advantage of those returns.
However, there is always a catch, and the catch is that if your foundation is not in order, any building you build will simply collapse right on the ground.
Get your foundation in order. Follow these ten steps and get ready to invest. Start on the right path and you will never stumble.
10 Things To Do Before You Start Investing | Simple dollar