Investing is great. But there are a few steps to take before you get started.
If you don’t set yourself up for success by taking care of these items first, you’ll be setting yourself up for failure down the road.
Here is what I recommend you take care of before you start investing…
1. Have A Fully-Funded Emergency Fund
First things first.
Unexpected expenses WILL happen.
No matter how good you are at planning and preparing, something will happen sooner or later that wasn’t on your personal spending radar.
These expenses are generally not only unexpected, but they also are time sensitive, they need to happen now.
Without an adequate emergency fund in place, many people will struggle to cover even a $400 non-budgeted expense.
Financial advisors, financial planners, and just about every financial expert will recommend having an emergency fund between 3-6 months worth of living expenses.
2. Know Your Cash Flow, Have A Budget
When thinking about investing, you need to think long-term.
“Investing” for the short-term isn’t really investing, it’s speculating, which is basically gambling.
There are a number of uncontrollable factors that can cause investments to go up or down short term, so any money committed to investing shouldn’t be needed for at least five years.
Having a household budget allows you to understand exactly where all of your dollars are going each month.
The first thing to do with this extra cash is to build up your emergency fund as mentioned above.
After that you should consider if you will have any large expenses coming up in less than five years: Will a new car be needed? Is a child’s college approaching? Might a child get married in the next few years?
If there are events like these coming up then start putting aside money for them now, money that probably shouldn’t be invested in the stock market because of the “short” timeline.
After you’ve determined any large upcoming expenses, and set aside enough money to cover them, now you can look at your monthly cash flow and determine how much money you want to invest.
3. Clean Up Your “Personal Balance Sheet.“
In short, before you put real money into any stock or bond, you must first pay off your high-cost debt.
Carrying high-interest consumer debt is one of the largest barriers for people who are trying to grow their wealth and achieve financial freedom.
There are never any “sure things” in investing, but paying off consumer debt is a “sure thing” because you know exactly how much you’ll save. Knock out these easy things before putting your first dollar into an investment account.
4. Clarify Your Goals and Priorities
Managing cash flow is all about balancing priorities, you’re taking limited resources and allocated them to the areas that are most important to you. This exercise is key for your overall financial planning too.
Before getting started on your investing, take a few moments to think about what is really important to you.
If you spend time thinking about it, you likely have one big top priority.
Some people can quickly tell you what their driving dream is, but many people need to spend time on this.
Understanding what is really important to you can have a huge impact on planning all parts of your life and the actions you take when presented with different options.
5. Make Sure You Understand Investing Basics
No one should invest in something they don’t understand.
Along that same line of thinking, that means that you should have a basic understanding of general investing concepts.
You should understand the concept of diversification (don’t put all your eggs in one basket). Understand mutual funds, and ETFs, and the difference between them.
Make sure you are comfortable with the idea of volatility.
Jumping into investing with no idea of what you are doing is very dangerous.
Even if you decide to use an investment advisor, you should make sure you understand what they are recommending for you. If something isn’t clear to you, just ask. A good financial advisor or planner is going to take the time to educate you to make sure you are comfortable with the suggestions.