Doesn’t investing sound like fun? It is, and it can be really rewarding! But no matter how “ready” you might feel to jump in, you’ll need to do your homework (and some prep) so you don’t get burned. Here are six things you’ll want to get in order before you start investing.
Pay Off High-Interest Debt
This is always priority number one, but even more so before you invest. Why bother putting money into an investment account if you’re still accruing hundreds of dollars of interest a year? Interest rates on these accounts (especially credit cards) are much higher than the returns you’ll make in the stock market at first. Pay off your debts first, and you’re much more likely to end your month in the green.
Have an Emergency Fund
An emergency fund is next on your list, because it’s arguably just as important as paying off your debt, and for a similar reason. If you can’t afford to put money away to save for unexpected expenses, you probably can’t afford to buy stock. This fund is your first line of defense against unexpected events, like a job loss, medical emergency, or major car repair. Building a portfolio without this safety net is basically asking yourself to sell your assets to cover your behind.
Know Why You’re Investing
What draws you to investing? Do you want to make passive income? Or are you trying to save for retirement? Write down your goals first so you can make the types of investments that align with them. For short-term goals, you’ll want to choose safer investments. For long-term goals, you might be more comfortable taking on more risk for the possibility of higher returns. Your “why” could be anything — it’s just important that you know it.
Create a Budget
You need money to invest. And to know what you can afford, you’ll need a budget. You probably haven’t gotten to this step without a budget. But just in case, here’s a gentle reminder that a budget is the cornerstone of every healthy financial plan. Remember to create a new category for investing; you’ll likely need to move money from other categories to cover it, but hopefully that’s easy by shifting over what you were spending on high-interest debt, right?
Know Your Risk Tolerance
Risk tolerance is your ability and willingness to endure market fluctuations. How would you feel if your investments lost 20% of their value in a single month? Many people’s hearts would fall into their stomachs, but others wouldn’t be phased and could keep their faith that the market would correct itself. There’s no “right amount” of risk tolerance. There’s just one that makes sense for you, and that will help you build a portfolio that doesn’t keep you up at night.
Research Your Assets
Know what you’re buying before you buy it. This doesn’t mean you need to become a stock market expert overnight, but you should have a basic understanding of different investment vehicles like stocks, bonds, and mutual funds. You should also have a good grasp on what’s drawing you to invest in the company, and “hearing about it on TikTok” is not research. Educate yourself (or hire someone to do this part for you) to ensure you’re always making informed decisions with your money.
