10 Steps to Take Before Investing – Beginner Investment Tips

By in Automatic Saving, Budget, Debt, Investing

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

What to Do Before Investing in a Stock or Mutual Fund

Buying and selling stocks, bonds and mutual funds is a path to wealth, yet, there are steps to take before investing.

At the start of my investing career, I thought it was cool to research and invest in the stock and bond markets; until I had my first loss. When my first stock pick drops 50% in price, I wasn’t having fun! Fortunately, I learned from that loss and went on to invest successfully. Here you’ll find out what to do before investing in mutual funds and stocks so that you can be a successful investor.  

Investing isn’t a game, but a way to gain wealth. Over the past 100 years, the trend of the investment markets has been up, and investors who stay in the markets through the ups and downs, profit.

In 1928, $1,000 invested in the S&P 500, a measure of the U.S. stock market,  would be worth $328,645 at the end of 2016. That’s a compounded annual return of 9.53%, according to the statistics of  Dr. Aswath Damodaran of NYU Stern School of Business. 

First, there are factors to consider before investing. Without appropriate financial preparation, you might begin investing and be forced to sell your newly purchased mutual fund or exchange-traded fund at an inopportune time. So, before investing in mutual funds or stocks, get your money house in order.before investing take these steps

10 Steps to Take Before Investing for Your Future

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 inconvenient, but 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. To help get started and avoid procrastination, pledge to track your money for just one day. 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-This one is difficult too, but do it anyway. Find a budget 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. If you’re spending on snacks at work every day, bring from home and you can save thousands to move into your investment account. 

5. Follow the spending plan-Do the best you can, you don’t need to be perfect. Adjust along the way. When you go out for drinks, you might decide a beer is as much fun as a martini, and less than half the cost. Understand that 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.

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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 to list all 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. Auto-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 human resources 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 family “emergency” fund in both government I-bonds as well as in a savings account. After a big withdrawal (did I mention we had a car accident last year?), prioritize getting cash back in to replace the money you took out. 

9. Buy inexpensive term life insurance if you have someone (spouse, kids, parents) depending on your incomeTerm insurance doesn’t cost much and if you die, your family doesn’t end up in the poor house. If you don’t have dependents – you’re single, both partners work and don’t have kids, or your kids are grown –  then you may not 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 won’t need for five years or more. Because the financial markets are volatile you don’t want to invest $10,000 that you need for a down payment on a car in two years, only to find that in two years, the $10,000 you started out with has dropped in value to $8,000.

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Remember to enjoy life! Wealth in life includes living day-by-day.

 *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 wealth building step to take daily.

2. Before investing, read about investing in mutual funds for beginners.

3. When you’re ready to invest, make sure to pick up the free eBook and our other free giveaways.

This article was revised and updated on May 5, 2017. Originally published in April 2010, this was one of the first articles on Barbara Friedberg Personal Finance.com. The advice is timeless and holds true today.