10 Steps to Take Before Investing

By in Automatic Saving, Budget, Debt, Investing | 22 comments

“What is important for kids to learn is that no matter how much money they have, earn, win, or inherit, they need to know how to spend it, how to save it, and how to give it to others in need. This is what handling money is about, and this is why we give kids an allowance.”
Barbara Coloroso

Investing sounds exciting and glamorous. At the start of my investing career, I thought it was so cool to research investments and invest in the stock and bond markets; UNTIL I HAD MY FIRST LOSS. When I saw my first stock pick drop 50% in price, I WAS NOT HAVING FUN!

Investing is not a game, but an important activity to facilitate the accumulation of wealth. In the short run, your investments may lose money. Although over the past 100 years, the trend of the investment markets has been up.

Barbara Coloroso’s advice to kids holds equally true for adults. For that reason, this list tells you in plain English what to do before you even think about investing* and why.

 before investing take these steps

10 Steps to Take Before You Invest

1. Open a bank checking account-You need this account for your monthly expenses. Internet or bricks-and-mortar banks are fine.

2. Open a bank savings account-This is where you keep all of your short term savings. Build your emergency fund in the savings account. Internet or bricks-and-mortar banks are okay.

3. Write down your income and expenses for a month-I know this is a pain in the —–. You must do this to be in control of your cash. There is no way out! Start with a small notebook, app, or day calendar. Pledge to do it only one day first. After the first day, continue; one day at a time. As a reformed procrastinator, I can vouch for the strategy of “baby steps”. That is, start small and take this task one day at a time.

4. Make a budget or spending plan-I know this one is painful too; but do it anyway. Find one that works for you. Once you find out where your money is going, you can decide if you are getting enough pleasure from your spending.

5. Follow the spending plan-Do the best you can, you don’t need to be perfect. Adjust along the way. Maybe when you go out for drinks, you’ll decide a beer is as much fun as a martini, and more than half the cost. These steps may seem tough at first, but gaining financial control is an  important part of lifetime  wealth building. And you can’t start investing if you don’t have your financial house in order first.

6. Pay off all credit card debt-You cannot move forward financially with credit card debt. Find a way, there are many resources available to help. But the simplest plan is just to list all of your debt-so you know how much you owe. Choose one debt to get rid of first and pay at least triple the minimum (or more if possible) on that account. Pay at least the minimum on the remaining debts. 

7. Transfer a specific amount regularly into the savings account-Don’t worry about the amount in the beginning. Just develop the saving habit. The easiest way is to complete a transfer form (from paycheck to bank) at your work HR office. 

8. Save enough in the savings account to equal 6-8 months living expenses- Allocate this savings for unexpected emergencies and replenish after using. I keep our families “emergency” fund in both government I bonds as well as in a plain vanilla savings account. After a big withdrawal (did I mention we had a car accident last year?), prioritize getting cash back into replace the money you took out. 

9. Buy inexpensive TERM life insurance if you have someone (spouse &/or kids) depending on your income-Term insurance doesn’t cost much and if you die, your family/spouse does not end up in the poor house. If you don’t have dependents; you’re single, you both work and don’t have kids, or your kids are grown and the death of one partner won’t sink your finances, then you don’t need life insurance. Stay away from the fancy versions of life insurance. 

10. When you begin to invest in the stock and bond markets, do so with money you expect to leave invested for five years or more. Because the financial markets are so volatile. You don’t want to invest $1,000 in the markets that you need for a down payment on a car in two years, only to find that in two years, the $1,000 you started out with has dropped in value to $800.

Remember to enjoy life! After all, you’re not doing all this planning to have a miserable life or simply for some far reaching goal. You must live and have fun along the way.

 *Caveat: If your employer matches your contribution to a retirement plan, then contribute enough to get the employer match. If you don’t contribute, you are throwing away free money.

Action Steps:

1. Choose one step to take today.

2. Complete one step per week. Enlist a friend and complete the steps together; it will motivate you to continue.

3. When you’re ready to invest, make sure to pick up the FREE Investing Cheat Sheet; 14 Rules for Wealth Building With Investing.

This article was first published in April, 2010. This was one of the first articles published on Barbara Friedberg Personal Finance.com. The advice is timeless and still holds true today.

 

    22 Comments

  1. I agree almost entirely with this post Barb. The only thing I would change is I would suggest immediately contributing to a 401k plan with that very first check out of college. (Even if there is not an employer match.) I agree that emergency funds are important and such, but I am a firm believer in paying yourself first, and getting used to not having that money from the very start. Not to mention the tax protection you get for the money you put into your 401k.

    Everyday Tips

    October 12, 2010

  2. @Everyday,You caught me here! :) I completely agree with you about immediately contributing to a work retirement plan. You made this important point so clearly I really have nothing to add. Thanks for keeping me honest.

    Barb

    October 13, 2010

  3. Great step, although I don’t think I have a savings account. And I don’t have a real emergency fund now either (at one time I did though, but I kind of outgrew it…) I still have plenty of near-cash invested, liquid resources available should an emergency arise!

    I agree with Kris, I started my 401k early in my working career and haven’t regretted doing that in the slightest! :)

    Great list though, expecially the term life insurance! I just recently increased mine (it was way too low of coverage).

    Money Reasons

    October 13, 2010

    • @Money Reasons-Thanks for shedding light on a really important topic: liquid assets. You beautifully illustrated that there is more than ONE way to reach one’s goals. The idea of this post is to approximate what one should attend to before investing, not to DICTATE. As long as there is access to some cash in case of disaster, that’s the important point! Thank you!

      Barb

      October 14, 2010

  4. Another post that I wish I read 14 years ago! I did none of these things before thinking about investing, and my finances crumbled because I didn’t have a solid foundation!

    I’m also in favor of immediately contributing to a 401k. It is so easy to save money that never reaches your hands. Just learn to live off of the balance.

    Khaleef @ KNS Financial

    October 14, 2010

  5. Khaleef, Saving first and automatically is an almost FOOL PROOF method of generating wealth. I am amazed when I look at the balances of retirement accounts from prior jobs. Time in the market is a great way to get wealthy.

    Barb

    October 14, 2010

  6. Nice Checklist Barb. Something I wished my mush brain would of read 30 years ago. Trying to get my kids on the right track at the moment. I like the pay off your credit cards and then pay yourself parts.

    Dave@50plusfinance

    October 15, 2010

  7. Dave, Sorry I didn’t write it 30 years ago! I was much less savy back then :) Let me know when you learn the secret to teaching your kids wise money smarts!

    Barb

    October 15, 2010

  8. Wow making money at home has sometimes really been really hard; almost always I purchase some ebooks and get money from those. although they get extremely expensive! Trying to make money without any sort of job experience is even harder. Some programs is so terrible, however this post really taught me a lot. Great Information! :)

    Matthew Rein

    October 29, 2010

  9. Great article! We, at centsables.com, applaud you for directing this advice to both adults and children! The best time for financial education is to start early!

    We are passionate about spreading the word!

    Therese

    August 2, 2014

  10. Great point about the money you are investing should be there for at least 5 years. Too many people treat the stock market as a get rich quick plan and when that doesn’t happen, they complain that it is rigged against them. It’s not. If you take a long term approach and stay invested, you will make money in the stock market.

    Jon @ Money Smart Guides

    August 4, 2014

  11. @Theresa, Thanks for stopping by and good luck promoting financial literacy.

    @Jon, Actually, I think 5 years is the minimum amount of time one should keep their investments in the stock market. If you’ll need the money sooner, then it’s a good idea to keep the funds in a cd, government I bond, savings or money market account.

    Barbara Friedberg

    August 4, 2014

  12. Thanks for this informative post Barbara. I’m also planning to invest my money in stocks. One of my friends told me about Systematic Investment Plan that he says is the safest stock investing scheme. Can you please guide me on that?

    Alissa @ FinanceWand

    August 5, 2014

    • Hi Alissa, It sounds like your friend is talking about a dollar cost averaging strategy. Please take a few hours to educate yourself on investing before you begin.

      Following are a few resources. Also check out How to Invest on the front page of the site.

      Check out: (free) How to Invest and Outperform Most Active Mutual Fund Managers http://forms.aweber.com/form/87/2066025387.htm

      and

      The Elements of Investing, by Malkiel and Ellis (100 pages) http://amzn.to/1ochDdi.

      Barbara Friedberg

      August 5, 2014

    • Thanks Nick. Step by step, and investing is easy.

      Barbara Friedberg

      August 5, 2014

  13. These are great step by step instructions. We are working on paying off all of our credit card debt before we start investing.

    Michelle

    August 8, 2014

  14. Michelle, Good luck to you. It’s a good plan to get rid of the credit card debt as quickly as possible.

    Barbara Friedberg

    August 9, 2014

  15. Barbara,

    Well, my wife and I have been debt free for two and half years now!(We paid off 125,000 in in 2.5 years) Since then we have an emergency fund in place, we invest approximately 30% of our income in retirement accounts; (15% of my annual gross income and 15% of her annual gross income). In addition, we are putting aside money for our kid’s college education. We have found that living on a cash budget and not using credit cards and using the same principles we used to get out of date to save and invest, has paid us ten fold in the last four years.

    socates

    August 19, 2014

    • I love your story. Do you believe that once you get used to living on less, there’s a certain satisfaction to that type of lifestyle?
      Personally, starting down the barrel of retirement makes my spouse and I so happy that we lived conservatively and directed our earnings towards investing and saving over the years.

      Barbara Friedberg

      August 20, 2014

      • Absolutely, and we feel a sense of security because we know we have extra each month that we are not spending. The lifestyle is still enjoyable and comfortable. Also we have watched our wealth build because of it!

        Socrates

        August 20, 2014

        • HI Socrates, I can attest to the fact that after years of living conservatively you have many more freedom and choices. Also, maintaining a cash cushion keeps the financial setbacks from sinking your boat.

          Barbara Friedberg

          August 21, 2014

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