10 Steps to Take Before Investing
“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.”
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.
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.
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.