Before you invest
When most people think about investing, they feel one or both of two emotions: fear and excitement. Fear because it’s a scary topic with associated risks, excitement because of the obvious potential upside. Oftentimes these emotions cause what is called analysis paralysis – people don’t take any action because they are over-analyzing the options and questioning their potential paths.
We want to help take the fear and anxiety (and even some of the excitement) out of investing. Investing shouldn’t cause fear, and it honestly shouldn’t even be exciting. It should be simple and boring.
One of the biggest parts of this process is understanding when to invest. We covered in a previous article that you should get your employer match on a 401k if one is available, but after that, there are some key activities to consider before investing any further.
Get your house in order
Are you paying all of your bills on time every month? Or are you still trying to get caught up on last month’s utilities? Are you living paycheck to paycheck, or are you able to practice enough discipline to live below your means? Make sure you are covering your needs and following a budget before you delve into investing.
Preparation for emergencies
Most financial experts recommend an emergency fund of 3-6 months’ expenses in an emergency fund. Your exact amount will depend on your unique situation, but this is a good target range for most people. If you have a less-stable job, or are a one-income household, you may want to lean closer to 6 months. If you have multiple incomes or are in a stable career, 3 months might make more sense.
Along with an emergency fund, there are other ways to be prepared for unexpected expenses. If you are financially responsible for anyone else, you should have life insurance. We recommend term Life Insurance, rather than whole life or universal life insurance. More on this topic in a future article.
You should also make sure you can cover any deductibles for your auto, home, or other insurances. Ensuring that you can cover these for unexpected emergencies is another good way to be prepared for the unknown.
Saving for the future
Do you have near-term goals that you should consider before investing, like finishing school or buying a house? Your dollars may be better used to pay for your degree or for a down-payment if this is the case. Most financial experts recommend saving, rather than investing, for dollars that will be needed within 5 - 7 years. The markets are too volatile to be able to count on positive returns in that short of a time period.
Debt
Do you have credit card or other high-interest debts? Do you have loans on depreciating assets like cars? Do you have nagging student loans that you would like to get rid of? You may want to consider paying your debts before you move on to investing. There are multiple schools of thought when it comes to debt, but most financial experts agree that there are certain debts that should be paid before investing, especially high-interest debts.
You are ready
Once you have control over your spending, are prepared for emergencies, and have considered near-term goals and debts, you are likely ready to invest. Our next article will go deeper into the details of how to approach investing for simplicity and success.