4 Questions to Ask Yourself Before You Start Investing

What are some of the most important boxes to check before taking the leap? Let’s dive in!

Get rich by investing

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You hear it everywhere, the single most important factor in regards to investing is time. We all have time, we are all running out of it with every second that goes by. What can you do about that? Get started! As a beginner, you should ask yourself these four questions before you begin that journey:

What are my overarching financial goals?

Personal finance is personal (I cannot be more cliché). Every situation is different, and that is why this question comes first. For many, their job is a means to an end. Keep food on the table, pay all of the bills, rinse and repeat. If you are in that boat, maybe you have a financial goal of retiring early! That is the boat I’m in, after one week working full time upon graduating from college, I could not believe that the majority of Americans spent 40-45 years doing this day in and day out. How am I going about achieving this goal?

I wrote an article here breaking down my personal strategy!

Perhaps you are one of the lucky ones who has a great career situation and wants to keep at it! While I cannot overstate the importance of retirement saving, maybe your goal is to buy your dream home or a boat. Physical possessions not of interest to you? Acquiring enough assets to become financially independent so you can travel the world can absolutely be achieved by investing.

Take the time to break down your goals, find your why and understand that this is not a get rich quick scheme.

Your goal will set the framework for how you invest. Some goals may even lead you to not invest (shocking to hear, I know). This leads me to the next question.

How much (if any) debt do I have?

There are so many schools of thought on this. Do you pay debt off before investing? Do you focus on at least high interest debt before investing? How long will it take me to pay off my debt if I do start investing? As always, unfortunately, the answer is it depends.

If reducing your debt is your number one financial goal, investing might not be the place to start. It is well documented that any known expenses that you intend to pay off within six months to a year’s time should not be invested. Some even go as far as to say that any known expenses within the next five years should be kept in a sinking fund (cash or other safe vehicles) as opposed to buying stocks/ETF’s etc.

My personal philosophy is that before you do ANYTHING, you need to have an emergency fund. Debt that is accruing interest, particularly high rates of it, is absolutely something I would want to crush, but life is crazy and s*** happens. At a minimum, you should strive to avoid putting yourself further into debt when these things come up (and they will come up).

There are also a number of schools of thought on emergency funds. How much do I need? Where should I put it? Does it have to be cash? (a concept that I will discuss further in the future but is not for beginners).

At a minimum, I like to suggest 3 months worth of expenses be kept in a cash emergency fund. If something bad happens and you lose all sources of income, 3 months feels like more than enough time to me to find new employment, even if it is just temporary. Ideally, something closer to 6 months of expenses is a very comfortable amount. If you secure that much in an emergency fund, you shouldn’t lose any sleep at night (at least from a financial standpoint).

Where should this live? Not in investments! This should be cash, preferably in a high yield savings account so you at least see a little bit of interest. This money is your cushion, its job is not to make you rich. It is your sleep well at night money. Every dollar you own has a job, it is on you to assign it.

What does my budget look like?

Another way to look at this question is, “How much can I afford to invest?” One of the all time biggest misconceptions about investing is that you need to be rich to do it. Even just $1 invested over a 40 year period (assuming 10% compounding) grows to roughly $45. Add some 0’s and you can see why even a little goes a long way.

So how much can you afford to set aside each month? Consistency is an absolute key when it comes to investing. If you have not taken the time to comb through your cash flows, you absolutely need to. Once you know exactly where each dollar you make goes, you can decide what the right amount would be to invest (this can apply to paying down debt as well). Separate the needs from the wants, and prioritize paying yourself first. That means saving/investing/paying down debt happens before you go out to eat and buy things that you don’t need.

This articles is great for beginners looking to start budgeting!

This video shows you how I manage my monthly cash flows, this not only gives me a picture of where each dollar goes, it also helps me keep a healthy amount in my checking account so that I won’t have any issues with bills, but I also am not keeping too much in checking and missing investment growth:

Building a budget is not easy, it isn’t fun, but it will reveal a whole lot about your financial health. It is an excellent use of your time.

Do I really want to be rich?

This sounds like a joke, but many don’t realize that investing is probably the single easiest way for an average person to become rich. becoming a millionaire likely seems unattainable, particularly if you are young. The math can be broken out thousands of different ways, but investing $2,400 a year ($200 a month, ~$7 a day) over 40 years at a 10% growth rate makes you a millionaire. This may sound like a lot of money, but cutting back on expenses and increasing income can absolutely bring you an extra $2,400 per year with dedication and focus.

Additionally, you do not have to start out at $200 a month! Just getting started is the biggest hurdle for most people. Start with $20 and get comfortable. Increase as you gain experience and move up in your career!

In conclusion, you might be ready to start investing if you have a healthy emergency fund and have your debt under control (or erased entirely). Today is always the best day to get started!

Check out this excellent ebook for beginners!

 

Index funds

 

For additional resources on investing check out this page!

I truly appreciate you for taking the time to read this! If you have any questions/comments etc. don’t hesitate to reach me, my contact information can be found here!

– RCG