Read this before you start investing

Spend/Save/Invest

Oct 12

Investing can be confusing and intimidating but also a very important and exciting step in your financial journey.

Here are five things to do before you start investing:

Disclaimer: This information is not financial advice and is meant to provide general information for educational and entertainment purposes. All investments involve risk and you should conduct your own research to make the best decisions for yourself.

1. Understand your financial situation

Before you make any financial decisions, you need to know where you stand. This involves understanding how money flows in and out of your bank account and whether or not you have enough money after paying essential expenses to invest. Take time to track your finances so that you understand where your money is going and where it can go.

However, remember that just having extra money lying around doesn’t mean you’re ready to invest it. There may be other steps you should consider taking before investing.

2. Make an emergency fund

One of the first steps on the journey to financial wellness is establishing an emergency fund. You should have an emergency fund separate from your invested money because invested money is subject to the highs and lows of the stock market, making it unreliable in an emergency.

Make sure your emergency fund is somewhere you can easily access and somewhere it won’t be affected by market fluctuations. Generally, savings accounts are used to keep emergency funds.

It’s recommended to have three to six months worth of living expenses in emergency savings. Start small by saving up one month’s worth of expenses and continue growing your emergency savings from there.

3. Pay off high-interest debt

If you have any debt that has an interest rate of over 5%-10%, you need to pay it off before you invest. Why 5%-10%? Well, the historic average market return rate is 10 percent a year, so if you choose to invest rather than pay off debt with interest over 10 percent, you’d actually be losing money rather than making money as the interest on your debt outpaces the gains on your invested money.

To pay off high-interest debt, you can use either the snowball or avalanche method, whichever one works best for you and your financial situation.

Make sure you get started on paying off your debts as soon as you can because the sooner you can free up your money to be invested, the more money you’ll gain in the market in the long run.

4. Consider your long-term goals

Before you invest in anything, it’s important to know why you’re investing. Do you want to start investing for retirement? Do you plan on buying a home in the future? Or maybe you’re just looking to build wealth?

Whatever your goal is, it’s important to understand that investors tend to be better off when they invest and hold rather than do short-term trading. This is because trading involves trying to predict what will happen in the market in the short-term, and the reality is that no one has the power to do that.

Instead, what we do know is that the stock market has historically trended upward, so investing over a long period of time and letting compound interest do its work on your money is a safer bet than trying to predict what will happen with the markets tomorrow.

If you have a money goal that you want to reach within the next few years, it may be better to save rather than invest toward that goal. For long-term goals, like retirement or buying a home, investing may be the best route for getting to your goal.

5. Learn more about investing

Again, investing is a big step in your financial journey, and like any other financial decisions you make, you want to be as informed as possible. You don’t need to know the ins and outs of the stock market to start investing, but you should have a basic understanding of how investing works and what you’re investing in. The lingo can be an intimidating barrier to investing, but don’t let it stop you from moving toward your financial independence.