4 Things You Need to Do Before You Start Investing
It’s never too early or too late to start investing, but there are some things you should do before you start pouring money into stocks, bonds and other investments.
To give yourself the best chance of success, you need to be prepared. Check these four things off your to-do list before you start investing.
1. Understand Your Financial Situation
Before you start investing, you need to have a plan. You can’t create a plan without first understanding your financial situation. This means knowing how much money you’re bringing in, and where you’re spending it.
Tracking your spending doesn’t have to be complicated. There are apps like Mint that will do the tracking for you, or you can do it the old-fashioned way by keeping a journal of your expenses.
Once you have an idea of where your money is going, you can look at your expenses and cut back. Ultimately, the goal is to make more than you spend. Then, you can start diverting some of that money towards paying off debt, building your savings and investing.
2. Pay Off Credit Cards and High-Interest Loans
When you reach a point where you’re making more than you’re spending, you can use that surplus to wipe out high-interest debts. This means paying off credit cards, title loans – anything that has an interest rate of 8% or higher.
Paying off debt will yield a greater return than traditional investments, and it will have an immediate positive effect on your net worth.
Getting rid of credit card and loan payments also means that you have fewer monthly bills, so you can eventually put more money into investments and savings.
3. Develop a Habit of Saving
Once you have your debt under control, you can start focusing on saving. You can’t start investing unless you save, and you need to be disciplined about it.
Most people want to save, but they never actually do it. In fact, a recent survey from PNC found that 40% of Americans couldn't cover a $400 emergency.
One of the best ways to start saving – and to do it consistently – is to automate the process. There are apps and services that will automatically transfer a percentage of your paycheck to a savings account. These tools can get you into the habit of saving without it feeling like a lot of work. For instance, there are apps that funnel a portion of your salary to your savings account. This would make for a hassle-free experience as you develop a healthy habit of controlling how much you spend every time your paycheck comes in.
4. Build Up an Emergency Fund
Finally, you need to build up an emergency fund before you start investing. Typically, an emergency fund consists of 3-6 months of living expenses in cash or cash-equivalents.
Having an emergency fund means that you can tap into the fund when you need cash instead of tapping into your investments.
Now that you have the building blocks, it's time to put your plan into action. Are you ready to start investing?
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.