Have you ever jumped into something too fast and felt immediate regret? A freezing cold pool comes to mind. Investing can be similar to a polar bear challenge. You do it once, expecting to feel empowered or something but instead you feel like an idiot and decide it was stupid. Never. Again.
Jumping into investing without enough preparation can make you think you’re not cut out for this. You decide it’s stupid, “for the birds”, or just a gamble. You set yourself up to fail and miss out on some amazing returns ($$$$$).
While it is a bit of a gamble, you have better odds than you ever will in Vegas. Why? Because the house always wins and you are the house, or will be, if you take the proper steps to prepare.
Everything you need to do before you make investments
Before you think “I’ll never be ready to invest after this”, I want you to know that these are the industry recommendations. I went to school for finance, and this was included in my coursework. It’s the a basic foundation of a healthy portfolio, but deciding to invest is a personal decision for you to make.
Having said that, these are the boxes to check before investing, and the foundation of your investment portfolio.
Payoff all your debt
Like, all of it. That’s the idea. Even a mortgage falls under this category. Before you invest, you should be completely debt free.
But why, oh WHY would you hold yourself to this rule? Is that even possible?
Yes it’s possible, let’s get that straight right now. More on that later. But the idea here is that you want debt gone ASAP. Cash you owe is cash you can’t invest! Total bummer, right? The sooner it’s gone, the sooner you free up some income.
However, you should know that I have debt and still invest. We have a mortgage and two cars in addition to plans for a second mortgage on an investment property.
It isn’t the end of the world. As long as you have debt payoff plans and are working towards them, it doesn’t hurt to start experimenting with some investments.
That way, once you are debt free, you’ll have the necessary experience to really get the most out of your disposable income. Ya. Get excited.
Have an emergency fund
Whether you want to invest or not, you should always, always, ALWAYS have a rainy day or “emergency fund”. The amount is flexible, but it’s advised (and taught by finance professors lol) to be 3-6 months of household expenses.
If that’s not motivation to cut costs around the home, I don’t know what is.
The principle here is to cover all of your regular expenses in the event of an unexpected event. Things like losing your job to a robot or needing a $5,000 tree removed from your yard before it turns your house into ground zero.
In all seriousness, we’ve had to use ours to do things like:
- replace the tires on the car
- fix our AC mid summer in Florida
You know, life things. You need one of these funds ready to pick up the slack so your investment contributions don’t have to!
Get set up with Life Insurance
This was seriously taught to us. Before investing, you need to have life insurance. Because otherwise, you’re setting your family up for a big ol’ mess.
If you have a spouse and/or kids, you want to make sure they’re taken care of. Covering the cost of a burial is barely skimming the surface. They’ll need some money to cover the income lost with an untimely death. But more than that, any assets you do have (through investments, etc) will be forfeited to pay your debts.
All the hard work of getting invested and making your money make money could be wasted.
Now if you don’t have a spouse or kids, it’s the same thing. Minus the whole “lost income for dependents” portion. Basically, as long as you have a policy to cover your debts and funeral costs, you’re on the right path.
Imagine inheriting the honor of burying your uninsured relatives. That’s cutting into your debt payoff/disposable income. Ouch. Don’t be that guy.
Write a will
In addition to insurance, you need to make some plans for your estate. I know that sounds super pretentious, but you are well on your way to having more money than you know what to do with so it’s justified.
What will happen to your money (and any life insurance) when you die?
If you don’t set something up, the government will. And they do some shady stuff, as I’m sure you know. I mean you aren’t relying on a social security payout, or you wouldn’t be here.
I got my will from LegalZoom. They have templates for specific circumstances like kids, pets, property, etc and they’re way cheaper and more convenient than going through a lawyer.
Create a budget
Investing is not something you do once. If it’s going to be successful, it has to be ongoing. After all, passive income is only pretty passive. There is going to be some work involved.
The right budget will get you debt free and evolve into a continuous investment strategy.
Open an IRA
An IRA, or Independent Retirement Account, is essentially a savings account you can’t touch until you’re 59 1/2 years old. Seriously.
I mean, you can withdraw the money you’ve put in, but you will be penalized. Mr. Tax Man gets 10% of what you take out, so it’s in your best interest to wait.
This is one of the crucial pre-investment tasks because it will teach you the most valuable lesson in investing: play the long game.
Don’t just open any old “savings account”. Hold yourself accountable and make the commitment to really investing. Put it somewhere you can’t touch it if your rainy day fund runs low. And the sooner you start, the better. The appreciation of IRAs only get better with age.
Open one today. I mean it!
The most valuable thing you can do right now
This list is meant to educate you on which things you should do before throwing money at your riches-to-be, but it is also my last point.
Before you start investing, you need to start learning. Soak up all the information you can get your hands on. Get familiar with all the processes, products, and profits.
The best way to learn is by doing, and fortunately you can start right now with fake money. There are practice trading platforms to get your feet wet and help you watch your portfolio grow with literally NO RISK.
Try Investopedia’s Stock Simulator here. They give you $100,000 virtual dollars and come with a full blown education. It’s seriously the wikipedia of money & market knowledge.
At the end of the day, you don’t really need any of these to get started, and I don’t want you to think you can’t invest because you have a car to pay off. You can invest, and I highly recommend you start ASAP. Because you have to start somewhere and these boxes can be checked after you buy your first share of stock.
Thank you for reading! Now could you do me a favor? Please comment below and tell me what’s stopping you from investing! I’m dying to know.