When you’re new to investing, it’s tough to know where to start. We all understand that money favors time and that we should start asap – but is that really sound advice? While it makes sense to begin early, there are some basics you need to have nailed down first.
A pre-investing checklist
Make a plan for your debt
Are you in debt? Most of us are. Student loans, credit card debt, a mortgage – very few of us have the luxury of always paying cash for everything up front. Having debt doesn’t kick you out of the investor club, it just means you need to go about it a little differently. Before you dive in and start an ETF, make a plan for that money you owe.
There are a few different schools of thought on paying off debt: You can either pay off the largest balance first or pay off the highest interest rate. Whichever you decide to do, make a plan and get to work.
Understand your cash flow
When you start to attack your debt you might wonder where you’ll get the money to break down that balance. To sort that out, look no further than your cash flow. Cash flow is how much money you having in each month versus what you’ve got going out. When you settle that number and allocate your dollars you have essentially created a budget (how sneaky). Good work!
Set up your emergency funds
The biggest reason that people rack up credit debt is that they just flat out don’t have the cash put aside to deal with emergencies. To break your reliance on credit, start an emergency fund. You’ll need a little one for mini-emergencies that has a few hundred dollars in it. Then you’ll need to start a big emergency fund that can cover 3-6 months of your basic expenses (which you’ll get from your budget).
Make the most of your work plan
While you’re deep in the paperwork phase of this, check in on your employer-sponsored retirement account. Up your contribution by a percent or two, and make sure you’re getting that match. Never pass up free money! If you have old 401k accounts leftover from old jobs, roll them over into an IRA. Left alone, they’ll just be eaten away by fees.
Scared? Start small
Investing can be intimidating for sure, but it’s not so complex that you can’t figure it out. If you’re the type who likes to test the waters before you dive in, start small with an investment that you can check up on for a few months. Make yourself comfortable with the platform you’re using and slowly allow yourself to become confident to invest more.
Set some goals
Investing is great, but why are you doing it? Short-term goals like a vacation or a new car – anything that’s 5 years or sooner – is best served by stashing your money away in a traditional savings account. But, when you start to look at the big picture and set your long-term goals, like retirement, starting a business, or putting a down payment on a house, that’s where investing comes in. Because your money will have time to grow, you’re able to take advantage of the market’s upswings. Savings pays under 1% in interest but investing had traditionally returned about 7%. You’ll reach your long-term goals faster and grow your wealth more with investing.
Automate as much as possible
By now, you should feel like you’ve got a pretty strong grip on your finances – it’s time to take it to the next level: Let go. Set up automatic investments and deposits into your respective investing and savings accounts. When you remove the human element and proclivity toward error from your finances, you set yourself up for success. If you don’t see the money, you won’t miss the money.
But what about when the market goes down? Or up? Or up and then down, all in the same day? When it comes to your finances and the market in general, even the most seasoned investors can panic and let emotions rule the roost. Don’t! Relax and let it go. The market goes up and down, it has done it before and will do it again. Because time is on your side, you’re able to ride out these dips and maybe even profit from the upswing.