What to do Before you Start Investing
TweetInvesting is a worthy and wise endeavor when it comes to financial health and stability. However, there are certain things that should be in place before you start investing.
Establish an emergency fund
Unexpected expenses are common, if you don't have enough in your bank account you'll have to pull the money from somewhere. If you have an emergency stash set up you won't have to borrow from somewhere else.
Too often people end up taking from their retirement funds or other investments when they get in a bind not realizing the penalties or because they have no other options. It's always best to have at least two months worth of expenses saved up before you start investing.
Keep the savings somewhere safe yet easily accessible, without any associated penalties for withdrawing. A run-of-the-mill savings account is ideal for emergency savings. It's safe, easy to get to, no penalties and you'll earn some interest (even if it's small) on your account.
Pay off high-interest debts
If you have high interest debt that you are paying on monthly, you may want to think twice before investing. For instance, if your credit card has an interest rate of 17% and your investments only have a return of 7%, you aren't getting anywhere fast. Get rid of your high interest accounts first, then roll that payment over into investment funds. You get double benefits this way.
Do your homework
Knowing how and where to invest your money can be daunting. There are so many different options and it's important for you to be as informed as possible.
The book Elements of Investing by Burton Malkiel and Charles Ellis is a short and easy read. The authors are considered two of the greatest investment thinkers of our time, if not of all time. You will have a clearer picture of investing and will be able to make informed decisions where to put your money.
Match your 401(k)
Even though matching your 401(k) is technically investing, and this article focuses on pre-investment prep, it is something you should do the minute it becomes available to you. This is the best performing investment you'll find. Continue to contribute to the match while you are building up your emergency fund and paying off high interest debt. The compound interest will accrue quickly and you will have a good security blanket.
