Are you ready to take your finances to the next level and invest your money? Fantastic! Investing is the best way to build your nest egg and beat the insatiable inflation monster. But before you get started with investing, there are a few things to take care of first…
What Is Investing, Really?
Before I dive into the to-do list, it’s important to understand what I mean by investing. I believe that anything you do to improve your financial situation is an investment.
Paying off debt, building a savings fund, working on a spending plan, the list goes on and on. Any action, effort, planning, or time you take to improve your finances is an investment. At its core, every dollar we do something positive with is an investment of sorts. It could be enrichment, nourishment, reducing debt, saving for something, buying securities, anything.
If we strip away labels, what we are really trying to do is use our money wisely and get the most bang for our buck. We’re managing a limited resource, so investing is the act of making the most efficient use of that resource.
That said, what we’re talking about in this post is the common definition for investing as it relates to finance: investing in securities. In other words, taking your money out of your bank account or your paycheck and using it to buy stocks, bonds, or both.
Aka: the best way to grow your money.
So, before you get started, let’s talk about what you need to do first.
What to Do Before You Invest in Securities
When it comes to investing in securities, the best time to start is always as soon as you possibly can afford to do so. As inflation grows, the money in your bank account shrinks, making investing your best shot at growing your money.
However, there are still things you need to do to prepare your finances for investment. Let’s begin:
Create a debt payoff plan.
If you’re currently fighting debt, then don’t invest your money until you have a solid plan of action for paying it off. That means paying more than the minimum each month and using a targeted payoff plan to do so.
Here’s what I mean about a targeted payoff plan: Choose one account that you want to pay off first. Then, pay whatever you can afford to over the minimum payment and then make minimum payments on the rest. (This is in opposition of paying a little bit extra on all the accounts at the same time.)
Once that first targeted account is paid off, do the same on the next targeted account (rolling over the amount you were paying on the first one on top of your minimum payment). Continue this process until you become debt-free. This method will drastically decrease your debt payoff time and the amount of money you’ll end up paying in interest overall.
Build up an emergency fund.
While paying off debt and before you tie up any of your money into securities, it’s important to have an emergency fund you can fall back on just in case something comes up. The amount you should ultimately have in your emergency fund varies based on preference, but we recommend saving one month worth of expenses prior to investing your money. That way you have some liquid funds available should an emergency strike.
Set up an investing plan.
Once your consumer debt is paid off and you have an emergency fund, then you’re ready to start putting your money into securities. But first, you’ll have to decide how much!
Thanks to something called dollar cost averaging, your best chance at steadily growing your money with securities is to regularly buy and sell. But in order to do that, you’ll need to regularly have money available to do so. The easiest way to do this? Allocate a certain amount of your income each month for investments.
Whether you go with something like Fidelity or Vanguard or set up an account with robo-advisors like Betterment or Wealthfront, you’ll have tons of options to help you automatically allocate your money into investments. The slightly more challenging part is deciding how much you can afford to set aside each month.
If your spending plan is pretty straightforward, then this may be an easy question to answer. But if you could use help working through your spending plan and determining how much money to allocate to investments, then you may want to speak to a fee-only financial planner. That way you can have the help of a professional who can guide you through your financial picture, help you see the possibilities, and create strategies to achieve your goals.
Once you’ve determined how much you want to allocate to your investments each month, you can tackle that goal just like you would your debt payoff goals and savings goals!
Never Stop Evaluating
These are steps to help you get ready to invest your money, but it’s important to note that working towards financial goals can be a fluid process. As you pay debt off or get a raise, you should be re-evaluating your spending plan and re-allocating your money. Or if your spending plan gets squeezed by something new, you should take a closer look and see how you can fix your overall plan. Get a bonus at work or a major tax refund? Look at your plan before you decide what to do with the money.
It’s often said that you make what you measure and this is absolutely true in personal finance. The more you evaluate your current status and goals, the more you can find ways to improve or optimize your situation. This isn’t to say you should be nitpicky or not have any fun with your money, it’s to keep you flexible, agile, and ready for anything.
Image Credit: Lukas Budimaier