Investing is one of the best ways to grow and preserve your wealth, but you shouldn't start investing unless you've done the 7 things below. Read the article below to find out how to create a proper foundation before you being investing.
1. Pay Down Your Credit Card Debt
Before you start investing, you must make sure to pay down your high-interest credit card debt. I'm not saying you have to be free from all debt here. For example, many people successfully invest with a mortgage and with student loans. There's a debate in the financial community regarding whether or not you should be totally free from all debt before investing. I am in the camp that believes that investing with some low-interest or asset-backed debt can actually be a reasonable financial plan. There's more to this analysis and we won't go into it in this piece, but it suffices to say that even if some debt is acceptable when beginning to invest, credit card debt is not.
Credit card debt is a terrible form of debt. It is debt for things you've already purchased or experienced and in most cases they can't be reliably sold off to pay off the debt. Additionally, most credit card debt is at a high interest rate (10% + on average). Credit card debt can be like a ball and chain on your leg as you attempt to run toward financial freedom and wealth - it won't allow you to go very far. You must remove the burden of high-interest credit card debt and vow to never take on such an insidious form of debt ever again before you being investing. Do not put any money in the stock market or any other market when you have an opportunity pay off your debt first. By paying off your credit tcard debt, you'll effectively be earning a return on your money equivalent to the credit card's interest rate.
2. Have Your Emergency Fund in Place
Before you start investing, you must make sure you have a rainy day fund in place to protect you and your household from life's financial emergencies. An emergency fund will help you withstand life's storms and it will protect your soon-to-be wealth in the form of investments from liquidation should you need funds to take care of a financial emergency. Check out the links below to get one of the deepest looks at why you need an emergency fund and how you can build one up incredibly quickly.
Further Reading: Why do you need an emergency fund?
Further Reading: How to quickly build up your emergency fund
3. Have Proper Insurance in Place
Before you start investing, make sure you have the proper insurances in place to protect you and your family. Here is a non-exhaustive list of possible insurance policies:
You obviously don't have to purchase every policy above - purchase what you need in your current situation and adjust things as you move along in life and in your financial plan. If you're not capable of deciding which policies to purchase on your own, it is advisable to speak to someone who knows about these things. This could be a knowledge friend or a family member, but it might be wiser to speak to someone who would have a fiduciary responsibility such as a financial advisor or consultant.
4. Decide on Whether to Invest Alone or to Use Some Sort of Financial Advisor
After you've paid off your credit card debt, built up your emergency fund, and put proper insurance policies in place for your current financial and lifestyle situation, you must ask yourself the following question: Can I go it alone or do I need assistance?
Many people successfully invest alone, but many also fail miserably when investing on their own because they can't do one or both of the following importing things:
What this means is that if you want to be a successful investor you've got to have some basic knowledge about why things go up and down in price (both short term and long term). Additionally, you have to have the discipline and emotional control to not panic and not get greedy, two things which are poisonous to your financial future. If you don't think you are capable of both of the above, consider using the help of a financial advisor or a financial consultant (at least for a short period of time).
It's not easy to find a good financial advisor. There are a lot of salespeople or charlatans in finance, but there are also a lot of excellent, inteligent, and kind-heated people. The dififcult part is differentiaing between the two. Don't hesitate to interview your financial advisor and ask questions - it's your money they will help yu manage after all.
5. Take a Risk Tolerance Quiz
Take any online quiz with a grain of salt, but I strongly suggest that you take a reliable online risk tolerance quiz to help you better understand your risk tolerance and your emotional capability to handle volatility within your portfolio. Here are two quizzes which I found useful and reputable:
6. Think Abut What You're Investing For
Before you start investing, think about what you are investing for. Are you investing to:
When you think about what you're investing for, you will get a picture of a very important concept called time horizon. Your investment time the horizon will help you determine the risks you can take in your portfolio - the longer the time horizon the riskier your portfolio can be because you will have more time to ride out the ups and down.
7. Give Some Money Away
Before you start investing, and once you have paid off your credit card debt, built up your rainy day fund, and put proper insurance policies in place, you should give some money away. You can give it to a non-profit organization like the Red Cross, to a person asking for money on the street, or to a friend or family member hat is in need. The fact that you're now ready and able to invest means that you're better off than most people on this big blue planet of ours. You should be thankful for this and that gratitude should compel you to do something nice for your fellow human beings, especially those who aren't as fortunate as you are. You don't have to give a lot, but it should be a meaningful amount of money for you. I promise that this action will warm your heart and it's likely that you'll keep on giving throughout your life.
Is anything missing from the list? Comment below or email so we can add it.
P.S. Make sure to put your first investment dollars in accounts where you get a "free money" (eg. some sort of match). This is usually an employer-sponsored retirement account such as a 401k. With such a match you get immediate returns. For example, if you get a 100% match, it's like getting a 100% return on your money right away with no risk. You can't beat that.
Further Reading: Why you need an emergency fund?
Further Reading: How to quickly build up your emergency fund
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