5 Things To Do Before You Start Investing
Yield your best benefit.
Photo by Karolina Grabowska from Pexels
Investing can be intimidating. But if you’re looking to build your wealth, buy a house or set up a retirement fund, investing is not only one of the best money moves that you can make –– it’s a must. For most people, understanding the basics and choosing the right investment strategy is enough to get started. But the most important question to ask when it comes to planning your financial future is whether investing is right for you, given your current financial situation.
So, to have a candid conversation about making strides toward the financial future you want for yourself, we tapped Lauren Anastasio, CFP® (Certified Financial Planner) at SoFi, during our recent Money Moves Digital Summit to share some tips on building wealth through investing, including what you need to know before you start, and how to really know if investing is right for you.
She identified five financial goals to accomplish in chronological order, before you begin investing in order to build the best possible financial foundation. ICYMI, we’re sharing them below, along with Lauren’s tips to yield your best benefit.
Establish a Safety Net
The first thing you want to do before you consider investing, is establish a safety net. Think about this as a cash savings equivalent to approximately one month's worth of your essential expenses. If you don't have at least enough cash to cover all of your living expenses for one month, then saving is your very first priority––that's the thing you should be doing, before anything else.
Seek Employer Match
Step number two is to obtain any employer match you might be eligible for. If you're not strictly self employed or you do have access to an employer sponsored plan, you will want to make sure that you're maximizing any match that you might be eligible for––you never want to leave free money on the table!
Protect Your Income
Third, protect your income. This means pursuing an appropriate amount of disability or life insurance, depending on your circumstances.
Attack Bad Debt
Next, you want to eliminate any bad debt, It’s important to make the distinction between between good debt and bad debt. Bad debt includes things like credit cards or personal loans, essentially anything charging 7% interest or higher. You will want to eliminate these in their entirety before moving on to investing. The reason is, there's an opportunity cost if you're investing and you can expect realistic average annualized returns of seven or 8% –but if your credit card is charging you 20% that's compounding daily, your money is going to be far more valuable going towards paying off that high interest rate debt than it will be going into the market. This is one step you absolutely do not want to skip.
Build an Emergency Fund
Step five includes establishing a fully funded emergency fund. This is when you take that safety net and build it up to a balance that's closer to between three to six months worth of your essential expenses. This is vitally important, because if you do have an emergency that comes up, including some type of loss of income, you don't want to have to take money out of the market and possibly trigger a taxable event or have to dip into that money when the market is down. You will want to make sure you always have cash on hand.
Once you’ve accomplished steps one through five, you’re likely ready to start investing! To learn more about investing and how to align your approach to your goals, visit SoFi.com/Invest.
ABOUT SOFI:
SoFi is a different kind of finance company whose goal is to help people get their money right. Whether you're looking to save, spend, earn, borrow or invest, SoFi is a one-stop shop for your finances, designed to work better together. Our products are built around our members—so that they have the tools they need to take control of their financial futures. Learn more by visiting SoFi.com.
DISCLAIMERS:
Advisory services are offered through SoFi Wealth, LLC an SEC-Registered Investment Adviser.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
A Millennial's Bucket List for Achieving Financial Freedom (Step 1: Start ASAP)
Early retirement? Yes, please.
Photo: Smith House Photo
If you’re a millennial who wants to achieve financial freedom sooner rather than later, there are several important money moves you should be making now. If you wait too long, you’ll spend your later years catching up rather than going on vacations, upgrading your house, or taking early retirement.
Ideally, you want to start making these money moves while you’re in your 20s and 30s, so you’ll be able to reap the benefits of your financial strategy for a maximum length of time. Here are the bucket-list items you should start checking off to set yourself up for financial freedom.
1. Create a budget.
A budget is essential. Make a list of all your income and expenditures, and add them up to see how you’re making out, monthly and annually. If you’re seeing a surplus, that’s great—but if not, you’ll need to tighten your budget by figuring out the amounts you need to make, save, and spend in order to make ends meet.
Even if it looks like you’re doing okay balancing your monthly budget, if there is room to scale down your spending, you should. Save a little extra and reroute that money into an investment.
2. Build an emergency fund.
One major car repair, injury, appliance replacement, or other big-ticket items can really set you back financially. Create an emergency fund against these possibilities and only dip into it when absolutely necessary. This way, you aren’t maxing out your credit cards or depleting your other funds if something unexpected pops up.
If you struggle with building up your fund, have extra money deducted from your paycheck so you’ll get a refund at tax time, then funnel that money into your emergency fund. And think of it this way: If you’re fortunate enough not to need your emergency fund, then you’ll be ahead of the game financially when your 50s arrive.
3. Set up a retirement fund.
Too many people wait to start saving for retirement until they reach middle age, which is way too late. Many millennials are tracking to follow suit, with two-thirds of them having saved nothing yet, despite the fact that they see retiring around age 61 as a reasonable goal.
Experts typically recommend that young adults should open an IRA or other retirement accounts, and definitely should invest in their 401(k) accounts, especially when employers offer matching funds. In fact, many Americans, in general, are missing out on this financially smart benefit. A solid rule of thumb is to put about 15 percent of your pay annually into a 401(k).
4. Think big.
A savings account is a smart idea; however, it’s not going to yield a big return via interest nor ferry you to early retirement. But if you do have money saved, then you have the option to make significant and potentially lucrative investments.
For instance, you could buy a rental property. You can list your home on vacation rental sites, collect rent, pay your mortgage, stash away the remaining funds, and build some equity. Over time, you might even want to add a property or two to your portfolio.
Or start your own business. Got an idea, passion, or golden opportunity? Take an entrepreneurial leap! Many businesses can be launched right from home on a shoestring budget. Put a plan together, get the word out on social media, then attend trade shows and other networking events to promote yourself and build your company.
These two options or similar ones put your wallet to work, and can eventually position you for solid financial footing down the road.
5. Take a few investment risks.
Even if you're risk-averse, it’s not a bad idea to know how the world of investment works. Done right, it’s a venture that can be quite lucrative. Look into investing just a little at first, whether in stocks, bonds, commodities, real estate, your sister’s promising business, or another opportunity. Then watch your investment carefully to see if and when it pays off. If it doesn’t, look to shift into another type of investment.
6. Rethink your location.
If you’re living in an expensive city, consider a change of scenery. These younger years are a perfect time to try out new places, anyway. So why spend thousands a month on sky-high rent or property taxes? By moving to a more affordable city, you could save loads on rent and living expenses. For example, Omaha is a cheaper market than Los Angeles. Take your savings and put them to work toward your financial goals.
7. Watch your credit spending.
As millennials, we are firmly a part of the digital spending revolution, which is convenient but makes it easy to overspend. When you can’t pay off your credit card bill every month, you’re charging too much.
To avoid accumulating credit card debt, pay close attention to your spending, delete shopping apps off your phone (or at least keep yourself logged out), and track your receipts. If you’re already in debt, consider debt consolidation so you can get back on track. (And speaking of debt, if you’re still carrying student loans, look into loan forgiveness programs or refinancing.)
At this point in your life, you’re young enough that small moves can make a big difference to your financial future. While age 60 might sound far off, the passage of time can surprise you. If you’re looking to get on track toward fiscal stability, now is the time. Check off these bucket list items and watch your financial freedom begin to become a reality.
Written by Molly Barnes, Digital Nomad Life.
Love this story? Pin the below graphic to your Pinterest board.
This post was originally published on June 5, 2019, and has since been updated.
MORE ON THE BLOG
We Answer All Your Money Questions Like “Where Should I Put My Dollars Now?”
Financial refresh this way.
We know first hand when women set their mind to something, they can truly achieve anything. That also applies to confidence around money. When you have the right money mindset and you experience the role it plays in living your best life, you’ll become a formidable force.
So it’s time to ditch all fear, obligation, and guilt that block your healthy views on money to achieve the life you’ve always wanted.
Financial educator, Catherine Alford helped us get to that place with her Morning Money Talk presented by Ally at the recent Future of Work digital conference. She shared tips for getting your finances organized at home and supercharging your savings (because we’d all like a little extra financial padding right about now!). She started her business from scratch with a $10 domain name and grew it to six figures so she knows a thing or two about managing money.
She explained that it’s hard to focus on your job, your side business, or your incredible start up idea if you don’t have your personal finances in order. Additionally, she says the more you save in your personal life, the more freedom you have to pursue your professional goals. Read on to learn about Alford’s three-step savings strategy.
Whenever I'm having those moments where I really don't feel like saving, I think of my three main reasons to save to remind myself why it’s important. Here they are:
Reason #1: Personal Freedom
Personal freedom is a massive deal to me. It's why I became an entrepreneur. I like doing what I want, when I want. I like choosing who I work with and what I spend my time on. I like having a job and still being able to pick up my kids from school. When you save your money and you're smart about how you manage it, the more personal freedom you have. Personal freedom with your finances allows you to walk away from jobs and situations that don't serve you and allows you to have fun too.
Reason #2: Leaving a Legacy
How cool would it be if your great-grandkids said, “Because of Grandma Cat or Grandma Sarah or Grandma Melody, all of us went to college debt-free?” What if, because of the lessons you taught and the discipline you established in your family, it changes the way your family behaves, perceives money, and donates?”
Reason #3: Extreme Generosity
Having savings also allows you to be generous with a friend who really needs help at a certain moment. I love the idea of extreme generosity, and I like practicing with micro generous moments. Remember, the more money you make, the more you can give away and make the world a better place.
How Much to Save and Where to Stash It
I like to have a three-step strategy when it comes to saving.
Get one month ahead.
Establish a solid emergency fund.
Set up sinking funds.
Get into the mindset of believing you're a warrior when it comes to savings and you are going to slash through these goals, however long it takes. If you want personal freedom, to leave a legacy, and to be extremely generous, these steps can help you get there.
Get One Month Ahead
There's a concept called mental load that's been gaining popularity over the past couple of years. It's this idea that women have to do thousands of invisible tasks, things people don't see, things we naturally take on ourselves like emailing our kids teachers or getting a birthday gift for our mother in law. No one assigns us these tasks. It's just that culturally women have taken up all of these tasks, and it is a heavy load on many days.
I don't want money to be one of those things for you, but money takes a lot of time to manage unless you get one month ahead. For me, getting one month ahead is stress-free budgeting, and here's why. When you're one month ahead, you start the month with all the money you need for the month.
The goal is to use your paychecks from this month to pay your bills next month. And if you're thinking, “That would be nice, but that's not possible,” you have to go back to your mindset. Remember, you are a savings warrior and you absolutely can accomplish that.
For some people, they can get one month ahead today by transferring money from their savings accounts and getting started on the first of next month. For other people, it might take a few months to get there, and that’s okay. What’s important is that you start.
Establish a Solid Emergency Fund
For ten years, I've been telling just about everybody to have a three to six-month emergency fund. And this year has completely changed my view on that because now, I am a fan of having six-plus months of an emergency fund.
If you have high-interest debt, like credit card debt, start with a one-month emergency fund. Then, pay off your high-interest debt as quickly as possible and go back and build your savings to six-plus months after that.
If you have low-interest debt, like a car loan or student loans, build your savings up to six-plus months now before aggressively paying those down.
I like to keep my emergency fund separate from my regular checking accounts and my investment accounts. I keep this money liquid. That means I can access it and have it today if I need it.
Set Up Sinking Funds
Sinking funds are little baby savings accounts for all of the big events and unexpected events that might happen in your life. Three examples are car repairs, holiday savings, and vacations.
One of the first sinking funds I ever created for myself was when I started my business, and I really wanted to get a MacBook Pro. I was in my 20s at the time, and it was the most money I'd ever saved. I would save a little bit at a time in an online savings account until I reached my goal.
That was my first experience, and I was hooked because it feels so good to go into a store with cash that you've already saved. There's no guilt, there's no stress, and there's no regret.
It’s the same thing with vacations. Have you ever taken a vacation that’s completely paid for up front? If so, you're not worried about getting home and looking at your credit card statement. If you save for vacations ahead of time and you have all that extra padding, you're actually able to relax. You can also use sinking funds for things like your kid's birthday party or holiday shopping.
To make this easy, Ally Bank’s Online Savings Account offers buckets. So, instead of having five or six savings accounts for various sinking funds, now you can consolidate them into one savings account with buckets inside of it named for your savings goals. This helps you to stay organized and in control of your money.
Bonus Tip: Automate Everything
I know a lot of people aren't fans of automation but for me, automating is everything. I automate my savings and paying my bills because it saves me a lot of brain space. It’s the easiest way to build up a savings account without thinking about it, and that is what I credit the most to being able to build up my emergency fund to what I have today.
If you've never tried automating or it makes you nervous, just try it for a month or so and see how you feel about it. Start by scheduling a small amount of money to automatically transfer to your savings account after you get paid. I know people worry about too much money being withdrawn from their accounts. However, after many years of automating, I have only had a problem two or three times, and it was quickly fixed with a phone call.
I hope with this three-step strategy, you can get started on your path towards financial freedom. Not only will having an emergency fund and sinking funds provide a great financial cushion but having them will also give you incredible peace of mind.
To learn more about Ally, visit ally.com
Ally Bank, Member FDIC
LOVE THIS STORY? PIN IT!
MORE FROM THE BLOG
