Investing is a great tool for building wealth, but there are some financial milestones you should consider before you start investing.
Investing has a stigma for being complicated, or something that is only for people that have a lot of money. While there is a learning curve when you first start investing, it’s important to know that anyone can invest, and you don’t need a huge sum of money to begin.
1. Have an emergency fund.
The money you plan on investing should be money you are comfortable not touching for a long period of time. It is not an extension of your checking or savings account, and ideally shouldn’t be taken out until you’ve hit the goal or time that money was designated for.
So before you invest your money, make sure you have an adequate emergency fund to reduce the need to dip into your investments. An emergency fund should have 3-6 months of living expenses set aside.
2. Get rid of high-interest debt.
If you have $20k on your credit cards that’s accruing 26% in interest, or other, high interest debt, you will want to focus your efforts on that before you start investing. I personally don’t think you have to be 100% debt-free before you invest, but you should certainly have a handle on the debt you have.
If you are in a position where you are overwhelmed by debt, consider talking to a professional to create a payoff plan that you can manage, (feel free to contact me about this here). And don't let debt discourage you from investing in the future, normally, when people become involved and passionate about getting debt-free, they end up building a great foundation of habits for investing.
3. Be able to still make extra payments on your student loans.
Student loans are slowing down the time it takes for a lot of millennials to move on to other financial goals, like buying a house or investing for retirement. Many think their loans need to be gone before they can contribute to these large goals, and I understand that, but by waiting, you are also shaving off precious years of compounding interest in your account.
My personal rule of thumb for investing with student loans is you need to be able to afford extra payments on your loans, along with investing. Even if that means you can only invest $50 a month, eliminating your loans should still be a top priority, but not your only priority.
Again, if you are struggling with debt, you're not alone. Reach out and get recommendations on the best path of paying it off.
4. If you have access to an employer plan, like a 401(k), 403(b) or 457, start there.
This is the easiest way to start investing, and there will be people there to help you through it. If you are offered a retirement plan through work, make sure you understand the terms, the investment options, and any employer matches.
A great initial goal with an employer plan is, if you are receiving a match from your employer (free money!) try to contribute enough to get the full match.
Another great goal is to put away 10-15% of your income in retirement accounts, and when it comes directly out of your paycheck, it will be that much easier.
5. No employer plan? Look into opening a Traditional IRA or Roth IRA.
The majority of Americans who are saving for retirement typically use an employer plan, like mentioned above. But, not everyone has access to these plans, so if you find yourself in this category you need to put in a tiny bit more effort.
Anyone with earned income can open up a Traditional or Roth IRA (Individual Retirement Account) and invest up to $6000 a year (as of 2019) or $7000 if aged 50 or older.
While investing in an IRA is not as seamless as having a percentage automatically withdrawn and invested from your paycheck like an employer plan, it’s not too complex to manage on your own! You will just have to decide how much you can afford to put away, and be disciplined enough to invest your money consistently. Read more about investing without an employer plan here.
6. If you’re self-employed, look into a SEP IRA, Solo 401k or SIMPLE IRA.
Being self-employed opens a few more retirement account doors, which can be great tools for building wealth, helping future you, and reducing your taxes today.
When you contribute to an IRA or 401k, the amount you put in is deducted from your taxable income the year you contribute, meaning you don’t have to pay taxes on it -until you pull it out of your account, that is.
If you’re self-employed, you should compare the retirement accounts available, the SEP IRA, Solo 401k and SIMPLE IRA. They all have slightly different rules and structure, so it’s important to understand your options. To learn more about investing when you’re self-employed, check out my free, online course.
7. Find your why.
Investing takes discipline, and when you first start out it is easy to feel like your contributions aren’t doing much. But understanding why you’re investing will help keep your motivation up, and maybe even encourage you to invest more.
Retirement is the most common goal people invest for, so it’s a good idea to understand how much you will need, and how your account can grow in the time you have. But your “why” is deeper than the numbers. What is this money going to afford you one day? Peace of mind? Freedom? The ability to live where you want, how you want?
Life is short, and tomorrow is not guaranteed, yet so many people spend the majority of their lives working in a place where they’re unhappy. Would some extra contributions enable you to retire earlier, and live a happier life?
Spend some time discovering your own “why”, and regularly remind yourself of it.
8. Get comfortable with delayed gratification.
The most successful investors understand and embrace delayed gratification. Yes, I know your daily coffee is very important, but $5 a day is $1825 a year, and $1825 (or $152 a month) invested annually, growing at 8% would give you…
$27,381 after 10 years,
$86,492 after 20 years,
$214,109 after 30 years,
$489,625 after 40 years,
and $1,084,444 after 50 years.
You get the idea.
It doesn’t have to be a specific sacrifice, but it is the easiest example. Look at your budget, figure out an amount you can cut from your spending, and invest it instead.
9. Understand the importance and value of paying yourself first.
When you’re investing for retirement or other goals, the best practice is to prioritize paying yourself first. It can be hard when you have bills, debt, or a family to take care of, but if you prioritize yourself last… there might not be anything left. The sooner you prioritize yourself, the more years you have to gain from the compounding interest in your investment account.
If you have children, it’s okay (actually, encouraged) to prioritize your retirement before college expenses. There are no loans for retirement, and if you don’t prioritize yourself, you might end up being a bigger burden to your kids than student loans would have.
10. Measure your progress in years. Not days, weeks or months.
This is the hardest one for me, because it’s easy to get focused and wrapped up on your daily progress. When you combine that mentality with investing, you’re not doing yourself any favors.
The day-to-day, and month-to month balances in your investment accounts will fluctuate, sometimes a lot. Getting wrapped up in what’s happening one day to the next will give you unnecessary stress, so remember to zoom out, and measure your progress in years.
Investing is a journey, and it goes a lot deeper than the stocks you hold, the dividends you earn, or your annual rate of return.
You don’t need to have the technical expertise of someone working on Wall Street to be a successful investor, you need to have the discipline, commitment, and self-purpose.
If you are stuck on a particular item, or have a question about investing, reach out and let me know here.
If you feel ready to invest, and want help from an advisor for your investment strategy, check out the services available through Friend of Finance and OCTO Capital!