3 Things to do Prior to Investing

I love that so many people are curious about investing.   The world of investing can be overwhelming for beginners – stocks, bonds, mutual funds, ETFs, annuities and the list goes on.  Investing is the key to truly building wealth.  I want you to get started as soon as possible.

A statement that I get often is “how do I invest in stocks.”  Before I answer that question, I always like to cover the basics which we’ll go over in this post.

 

do-these-3-things-prior-to-investing

Pay off High-Interest Debt

The first thing you need to do prior to investing is to pay off high-interest debt.  By high-interest debt, I mean personal loans, credit cards, payday loans and maybe even your auto loan.  Although there is no definition of what interest rate is considered “high-interest”, you should want to pay off anything over 8% as soon as possible.

For example, say you have $1000 on two different credit cards.  One with an interest rate of 4% and another with an interest rate of 19%.

  • $1000 with 4% interest rate = $40 in interest in 1 year
  • $1000 with 19% interest rate = $190 in interest in 1 year

Do you need to be completely debt free prior to investing?  No!  However, you should pay off your high-interest debt asap.  You’re high-interest debt may be costing you hundreds or even of thousands of dollars annually in interest!  T

Think of it this way, if your goal is to invest and make money, you need to make a higher percentage on your investments then you’re paying on your debt.  The average annual return since inception of the S&P500 is 10%.  Although that’s the average annual return, that number is quite misleading.  Most financial advisors would say that an 8% average annual return would be good.  Therefore, if the interest rate on your debt is higher than 8% than it’s not likely you’ll make more money on your investments then you’re being charged in interest.

If you do have high-interest debt, have you considered doing a balance transfer to a credit card with an introductory period of 0% interest?  Balance transfers can help you avoid the additional interest charges in an effort to pay off debt fast.  The key to qualifying for the best balance transfer offers is to have a good credit score.

Related: The Only Way to Pay Off High-Interest Debt

Emergency Fund

After you have paid off your high-interest debt, you should fully fund your emergency fund.  An emergency fund is 3-6 months saved in case of a financial emergency.  Financial emergencies include immediate home or car repairs and job layoffs among other things.  Having an emergency fund can save you from resorting to high-interest debt in order to cover financial emergencies.

An emergency fund can be a lot to save and very overwhelming.  First start by saving $1000.  You can use these 10 unique ways to save $250 this month to jump-start your saving.  In addition, automating your saving can literally making it effortless.  You can automate your saving directly

In addition, automating your saving can literally making it effortless.  They money will be out of sight and out of mind, therefore you won’t be tempted to use the money for a non-emergency.  You can automate your saving directly through your payroll by having part of your paycheck go to a different bank account.  Or you can set-up money to automatically be transferred from your checking account into your saving account.

Related: 4 Best Apps to Automate Saving (and save more money)

 

Start with your 401k

Many people don’t realize that your 401k (or employer-sponsored retirement plan) is your first chance at investing.  Most 401k’s are invested in mutual funds.  A mutual fund is a collection of stocks and bonds.

Does your job offer a 401k?  If they do offer a 401k, do they match your contributions?  If your job matches your 401k contributions, at a minimum you should be contributing up to the match.  That way you aren’t missing out on any free money.

  • For example, say you make $50,000 and your job matches 3% of your annual salary.  That means if over the course of the year, you put $1500 into your 401k, then your job will also put $1500 into your 401k.  Therefore, you would’ve received a free $1500!

Traditional 401k accounts involved pre-tax money.  That means the money is deposited into your 401k account prior to taxes being taken out of your account.  It helps to lower your income that is taxed also.  Since the money goes right into your 401k before you even see it, you won’t feel like you are “losing” money.

Related: 4 Things Millennials Need to do Now for Retirement

 

Bonus Tip

Now that you have paid off all high-interest debt and funded your emergency fund, it is time to start investing.  I am not saying that you have to be completely debt free before you start investing; however, it is important to look at the price (i.e. interest) that you are paying on the money you have borrowed (i.e. student loans, car loans, credit cards, etc…) versus that amount of money that you will actually make off your investments.

There are so any options when it comes to investing!  If you are looking to get your feet wet in investing, check out these 3 apps that help you invest with as little as $5.

 

I am so glad you want to start investing in stocks! Before you get started, make sure you have taken care of these 3 things.

Do You Have Any Tips for Millennials Looking To Invest?  What Should They Do Prior To Investing?

 

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17 comments

  1. One tip I would say is while you are busy getting out of debt and building your emergency fund, maybe play around with a mock portfolio where you can buy and sell mutual funds, ETF’s, and stocks to get the hang of how it all works and to teach yourself to learn more about it. Great post. We have been able to pay off all our debt except our house and are actively investing into my wife’s Roth403b plan with a match and also into a DRIP account on the side. We are going to be looking at increasing our investing over time to build up to higher savings!

  2. Great tips lady! We are meeting with a rep in two weeks to begin the process of getting our finances in order. Your blog inspired me to take the plunge. Thank you!

    1. That is awesome, Tanya! I look forward to hearing more about you and the hubby reaching your financial goals. 🙂

  3. This is great – I love reading about investing. I am paying off my debt first and then I am going to get into it. I intend on doing a lot more research first though 🙂

  4. I have a 401k and a TSP {government equivalent to 401k). I have both of mine set aggressively at this age and phase of life. I feel like I’m doing a tiny something. Great tips.

  5. Thank you for the tips! I want to invest, I’ve just felt like a fish out of water when it comes to actually doing it.

  6. Yes! So happy you mentioned high interest debt first! I think people need to be very focused on their interest rate when thinking about debt and investing. There’s a huge difference between 3% debt and 15% debt!

    1. Yes, DC! I have heard so many people lately mention investing in stocks. I hate to get in their personal business about debt but it is so important to recognize the different interest rates.

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