Preparation is key!
So, you’re ready to dive into the fantastic world of investing. Great! Before you start investing, you need to ask yourself a few questions to make sure you’re ready.
Have you paid off all your high interest debt? (Credit cards, lines of credit, personal loans, etc…)
Investing is great, and you should be excited about doing it. However, you need to understand how much money you’re paying on your debt before you begin to put money toward investments. If you’re paying 16 percent interest on $4000 in credit card debt (the national average), it really doesn’t make sense opening an investment account in the hopes of making 7 percent interest on your investment. You would in fact be losing money. Check out my blog post about paying off your debt.
How much risk are you willing to take on?
For most people, investing is a long game. You need to plot out a path and stay the course for the long run in order to maximize your returns. You need to understand the risks vs rewards of your investments. The worst thing you can do is panic when you see the market taking a hit and subsequently pull out all your money. Remember, a loss in your investment portfolio is only permanent once you sell. Understand the risks before you start investing.
How much money can you comfortably invest?
As I mentioned before, investing should be done with the long term in mind. Any capital you think you may need within the next 6-12 months should not be used for investing. A good way to ensure that you have enough assets to stave off any unforeseen situations is to establish an immediate and future emergency fund.
An immediate fund may be $1000 in your savings or money market savings account (my recommendation) at your primary bank. This money should be set aside for unforeseen expenses like an auto or home repair, medical expense, or unexpected bill. This fund will help keep credit card bills at bay since you have a fund to dip into when the inevitable happens.
A future emergency fund is 3-6 months salary saved in a high interest savings account. High interest savings accounts pay much higher dividends than traditional savings accounts and they protect your savings from inflation. This is important since it will most likely take you some time to build up this account and ideally, you will hold onto this money for some time. This account should be used in case of major emergencies such as an unexpected job loss or major medical expense. This account can provide you with the peace of mind you need during a major life crisis and can help you focus on getting back on your feet instead of wondering how you will pay your bills.
Explore your options!
When you are finally ready to invest, make sure you explore all your options before jumping in. My very first experience with investing was jumping straight into the stock market. I invested in Cisco and Microsoft at the very height of the dot com bubble. I ended up losing most of my money. I didn’t take the time to learn about what I was doing, or explore other options before diving in. And that is why I failed (Yoda voice).
Sit down with a Certified Financial Planner. CFP services are not free, and can cost upwards of $1500, but the knowledge and guidance you will receive can save you ten-fold down the line. In the investment game, mistakes cost you both time and money. It’s better to invest in a pro to lead you down the right path the first time.
Things to remember before you start investing!
- Pay down your high interest debt
- Assess your risk level
- Establish emergency funds
- Explore your options with a good CFP
