October 14, 2019
Technically, you could start investing as soon as you have even just a little bit of discretionary income set aside. However, would you really want to start investing (even if you can earn a solid 10%) when you have $7K in credit card debt that you’re paying 23% interest on? Probably not.
Two main goals people have when investing is keeping their principal safe and maximizing returns. To accomplish one or both of these objectives, you have to first get your house in order – a.k.a. do some homework. Here’s a list of what you need to do before you start investing.
You never want to start investing without purpose. Is your purpose behind investing retirement or is it to help you buy a house in 2 years? Those are two very different objectives— one being short-term and the other long-term.
Before you invest, you want to make sure you fully understand the investment and what you are getting into. Have you taken the time to evaluate each of the options in front of you in terms of the safety of the principal, the desired rate of return, the maturity term, alignment with end goals, the ease of investment and divestment, your diversification goals, etc.?
You owe it to yourself and to every other stakeholder to make the best decision possible.
Life happens. Your super reliable Honda could break down tomorrow, you could get sued after all these years of successfully running your business, or you could – God forbid, receive a call a loved one was being taken to the hospital. When you need money to cover these emergencies, you want to have cash on hand. When it’s invested there is unpredictability in terms of what you will get for your investment at that moment you need it most.
The solution to avoiding this unpredictability and still having money to cover emergencies is simple. All you have to do is create a savings account somewhere and maintain a balance to cover your needs in unprecedented times. This amount will depend upon your lifestyle.
So let’s talk about your lifestyle and get that out of the way.
If you want to make your money work for you, you need discipline in your lifestyle. We’re talking about your budget.
Take a deep dive into your budget and get a solid understanding of how much you can actually set aside to invest.
The term “discretionary income” really refers to the amount of money you can set aside every two weeks or four. If there happens to be an abyss in your heart that you must keep filling by buying fancy things and services (the latest gadgets, eating out all the time, and so on), you are far too dependent on your money to leave it alone for investment. Your money won’t work for you in such a situation.
For whatever reason, if you have high-interest debt, such as credit cards, the best investment would be paying them off ASAP since such a loan arrangement is likely charging you more interest than you could make back via investment.
Even if you manage to generate an amazing 12% return, those efforts won’t get you very far if you are paying a similar or higher rate on a loan or credit card (average credit card interest rates are around 20%). Yikes!
Paying off your high-interest debt before investing will lower your monthly expenses, help increase your net worth, and it should help your credit score increase as well.
If you notice, we did not talk about low-interest debt, such as student loans (particularly via the federal government), mortgage, or even car loans. If a loan is charging you 4% interest or less, you’re better off keeping more cash in your pocket and investing the rest.
Before investing on your own, it’s a good idea to make sure you aren’t missing out on free money or tax-advantages.
Take advantage of your employer-sponsored 401(k) if it is offered to you. If you do not have that option, consider an IRA to grow your retirement fund with your pre-tax dollars.
Being on the same page with your spouse is very important before deciding to start investing. Even young 25-year-olds in their first year of marriage need to have this conversation. Maybe one of you wants to retire and jet-set the world, while the other was imagining a quiet home to retire in. Being aligned will help you to make the right investment decisions from the get-go.
After your partner, comes your social circle. Does your social circle have the same goals as you or are they constantly influencing you to spend more or to join them on a trip you cannot afford? Finding friends with goals similar to yours will ultimately help keep you motivated and on-track.
A wise (wo)man will find a way to make their money work for them. One way to do that is by investing. Making sure all of your bases are covered before you start investing will save you time, headaches, and set you up for long-term success.