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4 Things You Need to Do Before You Start Investing

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Think you're ready to invest? Here's what to do before investing in the stock market

Before buying a home, you get it inspected. Before going in for an operation, you go to a pre-op appointment. Before getting married, you go on some dates. But what kind of preparation is required before you start investing? It’s a buy in, a big decision, and a commitment. So we should give it some thought before diving in!

When I began to consider opening an investment account, I was overwhelmed with the information out there on what I should or shouldn’t do. I didn’t know where to begin, and if there were any prerequisites I should check out before diving in.

The only thing I knew I needed to invest was an income, and that didn’t really help me out with the details. Turns out, there are a few things that ended up being vital to a successful investment journey for me! And they all started helping me out before I had even opened my investment account.

If you’re considering investing, there are four things you should do before you open and fund an account.

Pay off most of your debts

Before you start investing, you should think about paying off most of your outstanding debts.

My husband and I had a bit of outstanding student loans of our own before we started investing. They were accruing interest at a rate of around 6.5%. At the time, we were looking to open a standard investment account with an expected return on investment of 6% per year.

Even if we make the expected 6% on our investment account, we’d be losing money by neglecting to pay off our student loan debts! The interest was building faster than our potential investment can make money. So it seemed like we should pay these loans off before we began investing.

If you want your funds to work for you, you should weigh the interest rates of your debt versus the possible percentage gains on your intended investment. It might not be worth it to start investing until you pay off your debts!

However, it’s important to remember that saving and investing for retirement should be a priority even before you kick those debts to the curb.

Retirement really can’t wait. It should be an essential part of your financial plan, that isn’t dependent on whether you have small bits of debt or not. You don’t want to reach retirement age and realize you failed to plan for this part of your life!

Be sure to weigh your personal situation, and how much you should contribute to your retirement accounts per month based on debts you hold as well as other essential expenses. But make sure you contribute something no matter your circumstance!

But if you’re looking to open a standard investment account, prioritize those debts, then open your account.

Start budgeting

So once you’ve succeeded in paying off debts that could inhibit your financial success when investing, it’s time to make a budget. I know, I know. It seems cumbersome and tedious. But trust me, budgeting is a secret weapon to financial success.

Careful budgeting can be the difference between making your rent payment and overdrafting your bank account. I would know – there have been a few stressful times where I’ve failed to budget and paid for it with overdraft fees.

However, when I’m on top of a reasonable budget, I use my money well and proportionately – and even have money to spare on shopping with no guilt! And speaking of budgeting, if you want to have a successful investing career, you’ll need to plan out contributions to your investment account in your budget.

Sure, you could just invest a lump sum and watch it grow over the years, but most of us don’t start out with $10,000 to invest. If you’re like me, and you have a steady income that you want to portion off to include investment contributions, you need a budget.

Once I started budgeting a certain amount to contribute to my standard investment account, I started to get excited about reaching my investment goals. In order to actually begin investing, you have to make a plan. And a budget is that plan! Budgets help you take actionable steps towards your financial goals.

It doesn’t have to be rocket science. Start by listing out your income in one column, and your expenses in another. Make sure you hit every expense you might encounter in a month, and plan for the worst (the highest you might pay for a water bill or phone bill, etc).

Now, check out the difference. Chances are, you have a little buffer if you’re living within your means! Prioritize your investment contribution with this difference between your income and expenses.

Once you set up an investment contribution in your budget, you’re almost ready to invest.

Investigate your options

After you’ve nailed down a budget, it’s time to take a deep dive into the investment world. You need to know what’s out there, and what’s best for you! Here are a few of the popular options you’ll want to look into before opening an account:

  • Stocks– This is probably the most popular option for investing! Buying a stock basically entails buying into a portion of a company by purchasing a share that represents a piece of the organization.
  • RealEstateDid you know that you could buy into properties that a corporation maintains on investors’ behalfs? Depending on the location of the properties, this can end up being a very lucrative choice. Or you could actually purchase a building, property, or piece of land yourself, and start investing in it for consistent passive income.
  • Bonds– Bonds are a representation of a loan made by an investor to a borrower. Depending on who the bond is intended for, you could make back more than you lent over time.
  • Commodities – By investing in a commodity, you are investing in a certain material, such as gold or oil.
  • Options– Options are a bit more tricky to buy and sell – they are “contracts” for a certain stock, and have parameters around the prices and times they can be sold.

Also remember that more than one of these types of investments could be grouped together in a certain portfolio, run by portfolio managers, or individuals buying and selling the above mentioned investments. Portfolios are a great option for first time investors, and can take the stress out of understanding every aspect of where your dollars are invested.

If you’re interested in any of the above investments, talk with a financial advisor and chat through your options! When I opened my first investment account, I opened one through a financial advisor and chose a portfolio that matched my current risk tolerance. 

Find your risk tolerance

Find your risk tolerance

Speaking of risk tolerance, it’s time to find yours! Are you the type to take a leap of faith and go skydiving? Do you love a good dare? Are you comfortable with winging it on vacations? Then you might just have a high risk tolerance.

Do you plan out every minute of your life? Are you terrified of heights? It’s a possibility that you have a very low risk tolerance. Investing works the same way. You can either try to get a lot of money very quickly or wait and get a lot of money over time.

Here’s the tricky part though: There’s never any guarantee that you’ll make any money with either, but your chances are way higher if you try the slower method.

I definitely fall towards the low-risk end of the tolerance spectrum. I like to know that my money is safe and will hold its value – I’m not too comfortable with the thought of losing money on my investments. However, when I began investing, I told my financial advisor that I’d like to have a more long-term investment goal in mind, so my risk tolerance at the moment probably falls more middle of the line (since I’m following the “slower” method mentioned above).

Risk tolerance also has to do with your investment timeline. Let’s say you want to invest your money long-term, and you won’t really be watching your account. This might allow you to invest in more risky options, because you have more time to gain return on your investment.

If you’re looking for a short-term option you’ll withdraw soon, you might want to look into slower growing, “safer” investments that will hold their value over time. How much give and take can you handle in your investment account? It’s up to you, but you’ll need to consider this before starting to invest.

After you’ve paid off your debts, make a budget, investigated your options and found your risk tolerance, you’re ready to invest! Before you know it, you’ll be an investing pro and you’ll reap the many benefits that come with choosing to use your hard-earned money this way. I know I am!

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