Welcome to Investing 101! This will be a five-part series covering (1) Getting Ready (2) Basic Vocabulary, (3) Asset Allocation Strategies, (4) Mechanics, and (5) Seeking Professional Help. Please be aware (BEWARE!) that I am not a certified investment advisor, accountant, financial planner, or anything else of the sort. (I am, however, trained to write very thorough disclaimers!) The advice I’m giving here is what’s worked for me, but only you can figure out what will work for you — and that’s something no financial advisor can tell you, no matter how much you pay them.
I came relatively late to the investing game — although I had read and understood theoretically how important it is to “make your money work for you,” I tend to be very risk averse and I didn’t understand enough about investing to feel confident putting my hard-earned cash into an account that could actually go down — scary thoughts after all the effort I had put into earning and saving said cash. Letting my (meager) savings sit untended in an account for ten years probably was not the best approach, but it ultimately gave me the confidence to invest more intelligently when the time came. So, my approach is a cautious one, but I think it’s also a wise one where, hopefully, we can all learn from some of my mistakes.
The first two steps to any wise investment strategy are (1) having money to invest and (2) understanding investment basics. This post covers step 1; subsequent posts will get into the details of step 2.
In terms of having money to invest, it’s important to consider some priorities — investing is not something you have to do and, if you’re struggling with other financial challenges, it might not be wise. Here are my seven spending priorities:
1. Cover necessary, extremely frugal living expenses.
Make sure you are fed, clothed, housed, and your basic bills are paid. Later posts will cover more about how I have prioritized and reduced some of these expenses.*
2. Establish a very basic emergency fund.
Depending on your needs, this could be $500 or $5,000. This should cover any medical or home emergencies — anything that would otherwise requiring relying on credit cards to cover.
3. Pay off any high-interest or consumer debt (like credit cards or car loans).
I can’t say it better than Mr. Money Mustache, so I won’t: this is a hair on fire emergency!
4. Increase your emergency fund to cover living expenses for 3-6 months.
Cover whatever period of time will make you comfortable if you lose your job or have another unforeseen life catastrophe. Note that the urge to upgrade your 2012 Chevy Tahoe to the shiny new 2016 model is not an unforeseen life catastrophe. In fact, most car-related “emergencies” are almost never real emergencies — make sure you have good insurance and budget for repairs and fluctuations in gas prices. These types of things are neither unforeseen nor are they catastrophes.
5. Max out retirement accounts to the extent possible.
The earlier you invest for retirement, the more time your money has to grow, fertilized by the magical powers of compound interest. You cannot borrow money for retirement and YOU are the only person who is going to save it for you. So save yourself and start now.
6. Pay off all remaining debt.
Here’s where it gets a bit fuzzy and you will find a lively debate on the interwebs about who does what and how and why. My approach is to pay off all non-mortgage debt, including student loans, before focusing on my non-retirement investment account. I’m at that point now and am also aggressively paying down my mortgage, though not to the exclusion of saving more. If you have any debt at greater than 4% interest, pay it off as soon as you can.
7. Start saving!
If you don’t have cash on hand to invest now or don’t feel ready to take the plunge, take time to educate yourself about some financial basics, as well as different options and strategies you can take. Don’t worry about being late to the game — being an educated and prepared player is much more important to long-term success!
Next up: a primer basic finance and investment vocabulary (this is where it gets *really* sexy!).
*Note that nowhere on this list is “Buy a Chevy Tahoe,” but after you achieve #3, I think there is some room for a *tiny* (TINY!) bit of lifestyle inflation if you took #1 seriously. I don’t mean running out to buy a new iphone or eating out every night, I mean eating something more than rice and beans, allowing yourself a little leeway, and finding a sustainable balance of frugality that is right for you. Tread cautiously; it can be tricky to keep your spending habits in check.
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