What are the most important things you must do to start investing
Seriously though. What are the most important things you must do to start investing? This is a common question or thought regarding investing. People just donâ€™t know where to start.
You canâ€™t run before you walk. You canâ€™t walk before you crawl.
The same rule applies to investing.
People get excited about the possibility of getting a nice return on their money through investing.
I know I was!
So as soon as they have a little bit of cash in hand, theyâ€™re ready to invest.
They want to make their money work for them, and thatâ€™s completely understandable.
However,Â not everyone is in a financial situation where it makes sense to invest in anything!
Butâ€¦.butâ€¦.I thought I should be investing my money?
Yes, you should invest your money BUT a financial foundation is essential to long term success!
Life sometimes intervenes in the best-laid plans. You might have a great investment plan, but what happens if you lose your job? What if you get sick? What if your car breaks down?
With a career, there is a foundation, such as education, knowledge and experience. The same applies to investing.
The groundwork needed for investing is something that anyone can achieve with some time and effort.
It just takes a little time, a little learning, and a little bit of self-evaluation to build the foundation.
Here are 10Â things that you really should do before you even consider investing in anything beyond your savings account or your retirement plan.
This word seems to scare people. ðŸ˜ˆ
A budget helps you prioritize your spending.
Think about it simply: How much comes in â€“ minus how much goes out.
SinceÂ budgetingÂ allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that areÂ importantÂ to you.
Following aÂ budgetÂ or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
Budgeting doesnâ€™t need to be complex. It acts as a guideline and ensures you reach your spending goals.
I personally use Mint. Its intuitive and I can link all my accounts, investments, properties, etc.
2. Net Worth
My net worth?
Net worth simply means the total value of everything you own â€“ your home, your car, any valuables that could easily be resold, and the balances of your checking account, savings accounts, and any investments you have â€“ minus the total of any and all debts you have â€“ mortgage, credit cards, student loans, and so forth.
I know, that seems confusing. Check out the monopoly info pic.Â
So, if I owned a house worth $100,000 and a car that I could sell for $10,000 but I had $50,000 in student loans (and no other debts), my net worth would be $60,000.
More than anything else,Â your financial focus should be on this number and how you can make it bigger.
There are a lot of ways to make it bigger: paying off debts, not spending money on foolish or wasteful things,Â improving your income, and, yes, investing.
This might seem like an obvious thing, but itâ€™s not.
At an earlier stage in my financial life, my primary focus was onÂ my checking account balance.
Did I have enough to make ends meet for the month? How much money did I have left over to just spend on whatever comes to mind?
This is where budgeting becomes very important. How much comes in and how much goes out.
The best way to sum it up: focusing on your checking account is a very short-term perspective, while focusing on your net worth is a long-term perspective.
If you donâ€™t have a long term perspective about things, you shouldnâ€™t be investing.
If you find your checking account balance is more important than your net worth, you donâ€™t have a long-term perspective yet.
Destroy It. Eliminate It.
In your budget, debt is part of the â€œwhat comes out.â€
If you have high-interest debts â€“ anything above, say, an 8% interest rate â€“ there is nothing better than paying that debt. Be vigilant and aggressive. Pay it off as fast as possible!
Because there is no investment that offers a long-term return that will beat what youâ€™ll save from paying off your debt first. Such as credit cards, student loans or a car â€” at or above 8% APR.
Think of it this way: Making an extra payment on a credit card with a 15% interest rate is functionally the same as making an investment that returns 15% per yearÂ after taxes.
If you pay off $100 of that balance, thatâ€™s $15 in interest charges that you donâ€™t have to payÂ each year until that card is paid off.
There is no investment out there that can even come close to that with any consistency.
Not only that, paying off your credit card will have an immediate positive impact on your net worthÂ andÂ it will cause your net worth to start climbing steadily because itâ€™s not being held back by interest payments and finance charges.
In addition, getting rid of your debts means fewer monthly bills, which means that youâ€™ll immediately have more money to invest with than ever before.
Itâ€™s simple:Â If you have high-interest debts, you should be paying those off as your highest priority, far above any sort of thoughts about investing.
Paying them off will rapidly improve your net worth andÂ it will improve your monthly cash flow. This is your first step.
Own it. Take charge of it. Eliminate it. Destroy it.
4. Eliminate Your Worst Spending Habits.
When I look at my finances each month, I tend to look at it as a pile of income from which I have expenses that subtract from that income.
What comes in and what goes out.
Whatâ€™s left is a much smaller pile.
I call it â€œthe gapâ€Â â€“ the difference between my income and my spending.
That â€œgapâ€ is the money that I can use to invest. Naturally, I want that â€œgapâ€ to become bigger so that I have more to invest, which means Iâ€™ll be able to reach my goals sooner than before!
When it comes down to it, there are two ways to effectively increase your â€œgap.â€
You can eitherÂ spend less moneyÂ orÂ earn more money.
I could write endlessly about methods of earning more money â€“ getting a better job, getting a raise, starting a business â€“ but Iâ€™m actually going to focus on the spending part of the equation because thatâ€™s something you can take direct action on rightÂ now and see results immediately.
The thing is, most people get an immediate foul taste in their mouth when they consider cutting their spending.
Itâ€™s natural to get anxious thinking about cutting out the things you love.
Think about all the money spent on slightly extravagant meals with good friends. Think of the last hobby item you bought that you really enjoyed.
The idea of cutting those things seems terrible.
And itÂ is awful. The worst! Those arenâ€™t the things you should be cutting.
What you should be cutting, are the forgettable things, the purchases you wonâ€™t remember in a day, the things that are just quietly purchased and quickly forgotten.
A drink at the convenience store. Those enticing items placed right at the register. The latte consumed without thought or real pleasure in the morning.
Those are the things you should be cutting. The things you wonâ€™t remember a day after you spend them.
Watch for those things. Be on guard for them. When you see yourself about to thoughtlessly spend money on something that doesnâ€™t really matter, stop yourself.
Donâ€™t spend that money. Cut that purchase from your life.
Focus on eliminating whatever routine that brought you to the point of making that thoughtless purchase.
Start applying that method and youâ€™ll find yourself spending a lot less money on unimportant things.
5. Wants vs. Needs
You need to have a strong grip over your wants. You need to rule it; it shouldnâ€™t be ruling you.
Itâ€™s inevitable to want things sometimes. Thatâ€™s human nature. We see tasty foods, delicious wines, items related to our hobbies and interests, and we want them.
Do we need them though?
Trust me, this is a daily struggle even for me. I go to a restaurant and I want a beer. However, that beer is $5.50. I could buy a 12 pack for the same price.
Not worth it.
Am I saying to suppress all your wants? No, factor them in.
Impulse control is one of the most powerful tools that an investor can have in their toolbox.
One of the most obvious ways that you can see whether you have it or not is when youâ€™re considering purchases that you want or desire.
Do you have the self-control needed to avoid giving in to every momentary want and desire?
If so, youâ€™ll not only find it easy to have the resources you need to invest, youâ€™ll also find it easier to have the self-control needed to tolerate the ups and downs of the market.
6. Cash Emergency Fund
I am not saying grab a shoe box, stuff a couple thousand $$ inside, and bury it under the bed.
But, you need to have money in a savings account, or under the bed if you so choose, that you can liquidate in case of emergencies.
Like it or not, crap happens.
Life sometimes intervenes in the best laid plans. You might have a great investment plan, but what happens if you lose your job? What if you get sick? What if your car breaks down?
In those situations, many people turn to credit cards, butÂ credit cards arenâ€™t the best solution.
Thatâ€™s why I encourage anyone who is investing to have a healthy cash emergency fund stowed away in a savings account somewhere.
Itâ€™s there solely to ensure that lifeâ€™s emergencies donâ€™t upset your bigger financial plans.
Iâ€™m an advocate for what I call the â€œperpetualâ€ emergency fund. Set up an online savings account somewhere with an online bank of your choice (I like Ally due to the 2.20% APR)
Then set up an automatic weekly transfer from your primary checking into that account for some small amount that wonâ€™t kill your budget but will build up.
Then forget about it. Let the cash build over time.
Then, whenever you need some money for an emergency â€“ a job loss or something else â€“ transfer money back into your checking.
I recommend never turning off the transfer; if you find that the balance gets too high for your tastes, take some money out of the account and invest it.
ðŸ’¡ Ideally, an emergency fund should cover ALL expenses for 3-6 months.
Thatâ€™s the system I personally use and it works like a charm.
7. Life Goals
One of the key principles of investing is to never invest without a purpose.
What is your reason to invest?
I can tell you my reason and maybe it will spark some ideas!
I am a Navy Officer and by Spring 2028 I will have the opportunity to retire after 20 years of service. I could always do another 10 years if I wanted. However, my goal is to be financially independent by 2028 through my investments that I could retire after 20 years without feeling financially compelled to stay in.
I personally know too many sailors who canâ€™t retire after 20 years because they are financially dependent on their paycheck due to living outside their means. If they did choose to retire, they would have to significantly reduce their expenses, lower their living standard, and find another job.
Might I continue my career to 30 years?
Maybe, but I want it to be my choice!
I donâ€™t want to be financially dependent. I want to be financially independent.Â
Now that I told you my Life Goal â€” Whatâ€™s yours?
You canâ€™t really assess your time frame for investing and how much risk youâ€™re willing to take without a goal â€” both of which are vitalÂ questions when it comes to investing.
Take the stock market, for example. Itâ€™s very volatile, meaning that there is a significant short-term risk in the stock market. However, over the long-term â€“ decades, in other words â€“ the stock market tends to gravitate toward a fairly stable 7% average annual return.
You just have to be in it for the long term for stability.
If you have a short-term goal, investing in the stock market is risky! However, if youâ€™re investing for the long-term, it can be a great opportunity for you.
Again, all of this thinking should start with your own personal goals. Why are you investing? What are you hoping to do with this money?
Are you hoping to become financially independent and live off the returns? Thatâ€™s a long-term goal, so stock investing makes sense.
On the other hand, maybe youâ€™re investing to buy or build a house in a few years. In that case, investing in stocks probably isnâ€™t the best idea, since youâ€™ll need the money much sooner.
8. Your Spouse Needs to be on Board with your Plans
If youâ€™re married, any investment plan should be discussed in full with your spouse or significant other.
That discussion needs to cover at least three key points.
First,Â what is the goal? Why are we investing? What are we hoping to achieve?
Second,Â what is the plan?Â How exactly are we investing to achieve this goal? Do the investment choices make sense? Where are the accounts and whose name is on them?
Finally,Â is this something we both agree on?Â Is the goal something that we both value? Is the plan something that matches our values while also achieving the goal?
If you donâ€™t have this conversation with your spouse before you start investing, youâ€™re asking for trouble down the road.
Finances among Married couples are already perceived as a touchy subject.
It shouldnâ€™t be.
Sit down. Grab a coffee. Or, a beer or glass of wine. Maybe a shot or two. And discuss it and plan it out.
Donâ€™t be scared.
Having that support and accountability will only increase your success. Which leads us to #9.
9. Supportive Social Circle
I would say close your ears, but since youâ€™re reading, close your eyes if youâ€™re easily offended!
â€œBy choosing the right group of friends, you can push yourself to achieve bigger professional goals. You will move in the direction of the people that you associate with. Itâ€™s important to associate with people that are better than yourself.â€
-Warren Buffett & Bill Gates
I know, I know. Totally offensive! How dare they tell me I need to ditch my friends!
No, No, No. Donâ€™t go washing your eyes out with soap.
ðŸ’¡Â In other words, invest your time like you would your money: Wisely.
While itâ€™s absolutely vital that you switch to a mindset thatâ€™s focused on a budget, net worth and smart financial moves, you should also keep in mind that you are strongly influenced by your immediate social circle as well.
If theyâ€™re not committed to those things, itâ€™s going to be substantially harder for you to make those kinds of commitments.
Look at your social circle. Who are the people you see most often, particularly outside of work when you have the freedom to make those choices? Are those people financially minded? Do they make smart spending choices?
Or, are they constantly buying new things and talking about their latest purchases?
If you find yourself in a social circle that is â€œkeeping up with the Joneses,â€ you should strongly consider shifting your social circle. Donâ€™t ditch them. You might find that they just need a nudge or a mentor toward financial responsibility.
I would recommend spending some of your free time with people who have a financial perspective and desire to learn. Look for an investing club on Meetup, or simply explore other friendships with people you might not have ever hung out with before.
Youâ€™ll build some new relationships over time, ones that are supportive of positive financial progress and growth.
10. An Understanding of Your Investment Options
This is the final strategy for getting ready for investing and itâ€™s a big one.
I am a big proponent of continued education and learning.
Before you invest, knowing what different investment options are available to you and how to interpret them is important.
Do you know the basics of stocks, bonds, mutual funds, ETFs, index funds, precious metals, cryptocurrency and real estate? Do you know how to compare two similar investments to each other?
You need a basic understanding before you start investing.
If this is something youâ€™re unsure about, I highly recommend my article Investing for Beginners 101: The Complete Guide to Getting Started. This will help build your investing foundation and knowledge.
In the near future, I will be releasing an Investing Series that will break down every investment opportunity.
I also recommend reading an investor book that willÂ further your investment knowledge and growth. It will make you a smarter investor and assist your investment decisions.
My personal recommendation for an excellent all-in-one investment book, and my personal favorite is The Intelligent Investor: The Definitive Book on Value Investing by Benjamin Graham.
It is a spectacular book on investing. Grahamâ€™s philosophy of â€œvalue investingâ€ â€” which shields investors from substantial error and teaches them to develop long-term strategies â€” has madeÂ The Intelligent Investor the stock market bible ever since its original publication in 1949.
Additionally, here are the 11 Best Books on Investing.
Iâ€™m often astonished at how many people want to dive into investing without having a foundation. Itâ€™s Ok, because people without a foundation can still be successful. However, a solid foundation will only support your investing success.
I do understand why people want to start investing. They hear about investing on channels like the Fox Business Network and CNBC. They get excited about the possibility of getting a big return on their money.
Thereâ€™s always a catch, though, and the catch is â€” that if you donâ€™t have your foundation in order, any building you assemble is just going to crumble right to the ground.
Get your foundation in order. Follow these Ten Steps and you will be prepared for investing.
Get started on the right foot and youâ€™ll never stumble.
Good luck. May the Force be with You.
Semper Fortis. Semper Fi.