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Is now a good time to invest? That seems to be the million dollar question as coronavirus has swept the nation and turned the stock market upside down.
What I hear when people ask me this is, “If I invest in these current market conditions, can I get rich or would I be throwing my money away?”
Truth be told, I never know how to answer that question because personal finance is personal and different situations call for different actions.
What I do know is that there’s a better question that everyone thinking about investing should be asking: “Am I in a good enough financial position to withstand the ups and downs of the market over the long term or would investing right now be a risk that’s not worth taking?”
To answer that question, I’m going to share seven steps you need to take before you start investing.
Listen To The Episode
Define Your Goals & Priorities
Asking yourself questions like, “What goals do I have for my money?” and “What’s the timeline for reaching those goals?” can help you hone in on a clear purpose before you start investing.
In other words, different investment goals require different actions.
A real estate investor looking for immediate cash flow may be interested in totally different properties than an investor that’s looking for long term appreciation.
Investing isn’t a get rich quick strategy either, so you should consider using a high yield savings account for money you may need within the next five years or so.
Short term goals like saving for a vacation or a down payment on a house you plan to buy in two years are usually best saved for in a high yield savings account, but if you’re in your 20s and you need to set money aside for retirement, investing in the market could be a fantastic step for you and your money.
It really all just starts with you being clear on your financial goals.
Get Caught Up On Bills
Being late on your regular monthly bills is indicative of a monthly cash flow problem.
If you’re behind on bills, your number one priority needs to be coming up with a plan to get caught up before you start investing.
This could come in the form of more income or lower expenses, but you should not be investing money you don’t have and if you can’t take care of your monthly bills, then you don’t have the money to be investing.
Viewing investment returns as a kind of “get out of jail free card” is a bad strategy that comes from short term thinking when solid investing is a long term play.
Get yourself on solid ground by getting caught up on all your bills before you even think about starting investing.
Pay Off Consumer Debt
Consumer debt is anything you owe money on that isn’t a mortgage. That means car loans, student loans, credit cards, personal loans, etc.
According to debt.org, the average American has about $8,400 in just credit card debt. If you’re being charged 18% interest, paying off that $8,400 balance is a guaranteed 18% return on your money.
The average rate of return for the S and P 500 for the last 40 years sits around 11% or so, which doesn’t even touch the 18% interest you’re being charged.
Prioritize paying off your debt before you start investing- especially high interest debt.
By paying off consumer debt, you free up extra cash flow so you can invest more.
Having no liabilities gives you the confidence to keep investing and not be tempted to withdraw money from your investments during the inevitable market downturns.
Investing while knee deep and high interest consumer debt is gambling. So prioritize paying it off before you start investing.
Get Adequate Insurance
A financial disaster can wipe out everything you’ve worked hard and saved your money for.
That’s why it’s not enough to play good offense and just invest and make more money. You need to be playing defense and protecting your money as well.
The leading cause of bankruptcy in America is medical emergencies.
This means that financially speaking, quality health care insurance is a need and should take priority over investing.
There are a few more insurance plans you should have in place to protect you and your family.
The very last thing I’d want is for you to reach your financial goals, have some kind of emergency situation and then have all of your hard work go down the drain because you didn’t prioritize one of these insurance policies.
Make sure you protect everyone in your household with good, quality insurance.
If you feel clueless when it comes to insurance and you need to know how to pick good plans for a reasonable amount, tap here and download my ebook.
Save An Emergency Fund
Sometimes life gets in the way of our best laid out plans.
When I was in my twenties I used to carry a credit card for emergencies and I ended up using that credit card to get through tough life situations that were inevitable.
By the time we got married, my wife and I had about $20,000 in credit card debt combined.
Had we taken the time to build up emergency funds, we could have handled those events as they popped up and been able to invest and grow our net worth much sooner than we did.
Before we started investing, we built up an emergency fund in a high yield savings account.
In this account, we saved up six months of our necessary expenses, which again, I recommend you start with.
Your emergency fund is important because it keeps you from withdrawing money from your investments to cover things that pop up in life. Without an emergency fund, you could be forced right back into consumer debt or again, have to withdraw money from a retirement account.
Both of these come with a cost in the form of interest or fees and taxes.
So do yourself a favor and make sure you have money set aside so that when those tough times do come, you can not just keep investing, but you can actually protect your investments and let that money keep growing.
Learn the Basics of Investing
You don’t need to be an investing guru to get started, but before you get started, you do need to educate yourself on the basics. For example:
- Do you know the difference between an index fund and an ETF?
- What about the difference between a Roth IRA and a traditional IRA?
- Should you go with a fee only advisor?
- If you want to have an advisor, what about asset allocations?
Take time to familiarize yourself with these basics. You can do this by finding and listening to more personal finance podcasts just like this one, or you can read books like the Bogleheads Guide to Investing… or something along those lines.
The Libby app is a great place to check out books for absolutely free.
You can also head over to our private online community and ask investing questions.
Here’s something I want you to do: Put a reminder on your phone for 30 minutes every single day to learn a bit more about investing, so that when it’s time to dive in, you’re making informed decisions that are aligned with your goals.
Lastly, always remember to only invest in things that you understand well enough to teach to someone else. I remember when cryptocurrency was the hottest topic in personal finance a few years ago, but people didn’t really understand it and a lot of folks lost a ton of money.
Take the time to learn the ins and outs, because doing this can keep you from being taken advantage of or making a colossal mistake.
Implement Your Strategy
Once you have the knowledge, it’s time to take action.
If you determine that you need to work with a fee only advisor, you need to set up meetings to get to know him.
If you plan to go the DIY route, then you need to get the right accounts open and start making contributions.
The absolute worst thing you can do though, is not take advantage of the knowledge you’ve gained during your research period and not actively start investing.
Many people make that mistake.
They read these books, take courses and listen to all these podcasts, but they never actually take action with their own finances.
I don’t want that to be the case with you.
Put the things you’ve learned and your new found cash flow to work so that you can start building wealth for your family.
I totally understand why a lot of you guys really want to jump into investing right now.
If the market’s on the way up, you definitely want to ride that wave to get more gains and if it’s on the way down, you want to jump in at a lower cost.
There’s always this reason to want to invest and again it makes total sense, but neglecting to build a strong foundation with the steps I laid out could lead to financial disaster.