Tuesday, 5 May 2020

6 Things To Do Before Making Your First Investment

We are going to be talking about six things that you should do or you might want to consider doing before you start investing. Investing for me is such an important topic, it is a way that you can seriously grow your wealth and if you don't feel like you are quite yet ready to invest well, this article will be perfect for you because it will help you see the things you want to make sure you do get in line before you start investing.

1. Have An Emergency Savings Fund

Before you decide to take any extra money you are making in your job or in your side hustle and invest it in the stock market. You want to make sure that you have something stashed aside that is in a little more liquid place like savings account in case you have emergencies. Emergency savings funds are so important they are something that we talk about a lot in the personal finance world. The reason is that most Americans can't handle a $500 emergency. If they are just living their life and something pops up like a car breaks down, something happens in their home or someone gets sick and it cost $500, they typically have to go some sort of debt vehicle like a credit card in order to pay that bill, or They just don't pay the bill. We don't want this to happen so that is why we aim to have about one month's worth of fixed living expenses stashed aside in an emergency savings fund just to get started. And then you will build up to either three months, six months or nine months, whatever is most comfortable for you.

2. Pay Off Any Credit Card Debt

That doesn't mean you can't have a balance on your credit card if you do pay it off in full and on time every single month. Use credit cards if you are comfortable with using them and you are good at managing them. but if you have credit card debt where you are only making minimum payments and there is a balance carrying from month to month, you want to get that to zero because that debt is racking up a seriously high-interest rate that is working against you. If you are not prioritizing to pay off and instead you are investing. Well, you are getting yourself in a pickle of hoping that investing will outperform the rates on your credit cards and throughout history with a passive investing strategy which I will talk about in my next article.

You want to make sure you pay off any credit card debt and you are not carrying any credit card debt before you start investing. You also might want to consider paying off any other debt that has an interest rate of over 6%, before you do start investing.

3. Have A Debt Pay Off Strategy For All Of Your Debt

Have a good strategy and plan of paying off any debt that you have before you go into investing. Of course, you can still invest and pay off debt like your student loan or a mortgage even an auto loan. As long as those interest rates are lower than the 6% region, you can come up with a game plan to slit your excess funds to go towards paying down that debt and also investing for your future. So you have to decide what you prioritize more, being debt-free, or investing for your future. You can do both but I would recommend at least making your minimum monthly payments, and hopefully having a good plan in place and a debt reduction strategy, so that you know you will be debt-free as soon as possible.

4. Prioritize (Save For) Short-Term Money Needs

Another thing you want to consider doing before you start investing is to make sure that your short-term goals or any necessary expenses you need to pay within the next one to three years are already being prioritized. I mean, your saving for them before you use this money to invest. What I mean here is, you have some short-term money needs, within the next year or maybe three years from now, you are going to need a larger sum of money to pay for something like a deposit on a new apartment that you are going to move into. Or maybe every six months you have to pay for your car insurance premium if you are not paying for it on a monthly basis.

Maybe next year you know you are going to be getting married and you want to save up for all of the costs that come with planning a wedding. These are expenses that we are going to face in our lives and we know we are going to face them in a short time period. You want to make sure that you are prioritizing some money to be saved for these expensive things before you put all your money away in the financial market.

The reason is that when we invest it is typically a long-term game and I would not invest any money that you are going to need within the next three years. Because investing, of course, comes with risk. So jot down all of your short term money goals or short term expenses that you are going to be facing within the next one year or beyond into three years and make sure that you have the money or you prioritize and create a savings plan and set money aside for those things before you think about investing the rest. 

5. Understand The Risk Involved With investing

As I had mentioned before investing involves risk. Before you start investing is to understand the risks involved. The stock and bond market work very differently from your bank savings account and the checking account that you have. Even certificates of the deposit and money market account. Meaning that when you invest your money you are not guaranteed to have that money available to you when the time comes where you are going to pull that money out. The value of your money invested will fluctuate, it will go up and it will go down. Because you are actually purchasing shares of companies. Investing does involve risk you can lose some of the money that you initially invest. 

But the cool part about investing involving risk is that you can also have the opportunity to make more money and when you make more money through investing it is called passive income. Meaning, your money is going to work for you and you get to sit on the sidelines and sip your martinis or whatever your drink of choice is. But at the end of the day, it is so important to understand that there are risks involved when you invest your money.

6. Get Educated About Investing

Through education, you can understand the risks involved in the investing world and use them to your advantage so that you can invest with confidence and knowledge. The good news is there are tons of free education out there for you to start investing and wonderful books and courses as well. Investing is such a cool thing it is so fun to do when you finally know what you are doing. And you understand how the financial markets work and you have a strategy and a plan to go forward in your investing life. 

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