Financial Goals to Achieve BEFORE Investing

Financial Goals to Achieve BEFORE Investing   Before investing, you need to determine if you really have the money.  It takes time to see a return on your investment.  Keep in mind that they money you invest will need time to grow, in most cases, and you will need to patient to achieve long-term wealth.  Therefore, don’t invest money that you will need immediate access to a few months or years later.  If you are looking for fast money you need to realize it comes with high risks and you may lose everything.  Smart investors are patient and realize the rewards of investing take time.   

In order to build your wealth through investments, you need to understand your overall financial situation.  Take several key steps to make sure you are ready to start investing so you can build on a sound foundation.  

1. Have a Budget This is the step most people neglect.  But, in order to determine your financial health, you need a realistic budget.  You need to know exactly how much income you have and ALL of your actual expenses (even the small ones).  Once you know how much is coming in and how much is going out, you can make better financial decisions.

There will allow you to determine if you have “extra” money to invest. Take the time to save every receipt and record every expense for a month. You then need to categorize all of your expenses.  This will help you determine areas that you can begin to cut back and use the additional money you are saving to invest.  

Once you create your budget, you can determine your net worth by listing your assets versus your liabilities.  If your current debts outweighs your assets, you are not ready to invest!  You will need to take the time to reduce your liabilities before building investments.    

2. Build an Emergency Fund You need to build an emergency fund in case of an emergency.   Often people do not plan on losing their job or having health issues which can impact their income.  In these situations, it can devastate a family if they do not have some money set aside for difficult times.  Many people go into debt during such difficulties which only make matters worse.  

Establishing an emergency fund, will allow you to have money for a rainy day.  Keep in mind that this money needs to be accessible without penalty for withdrawal.  Don’t consider your 401(k) plan or the equity in your home as an emergency fund.  Both of these will lose their value when you need them for an emergency.  

You should create a cash emergency fund. This is not an easy task.  It may take time and discipline to build an emergency fund.  Save a little at a time or use your tax return to help build your saving, but take the time to set aside extra money to build your emergency fund.  Many financial planners recommend saving at least three and six months of living expenses, but more conservative planners suggest at least one year.  You should hold off investing until you have at least three months of savings in an emergency fund.

3. Pay Off High-Interest Debt If you have several credit cards or loans, you will need to establish the best method for you to pay down your debt.  Many financial adviser suggest the Debt Snowball or the Debt Avalanche to eliminate your debt.  

The trick is to eliminate high-interest consumer debt as quickly as possible.  Start paying the highest-interest debt first, then any other consumer loans, then student loans which is the Debt Avalanche Method.  Although most financial advisers recommend the Debt Avalanche Method since it saves you the most money in interest and has you paying off the debts in the shortest amount of time.  However, it may be difficult for some people to stick to especially if they do not achieve immediate results.  Therefore, they may choose to pay down their debts using the Debt Snowball method which has you paying the smallest balances first to help keep you motivated by seeing quicker results.  Regardless of what method work best for you, stick to a plan and pay off all of your high-interest debt before you begin investing.  

4. Max Out your 401(k) Contribution Although the first three steps should be completed before you consider investing, there is one exception to that rule...FREE MONEY.  

When someone is giving you money to invest, you invest it.  Even if it’s before setting up an emergency fund or paying off debt.  If your employer matches your 401(k) contributions, you're earning a 100% return on your investment instantly, before you accrue any gains from the market.  Therefore you should at least contribute what your employer is willing to match.  If your employer matches up to 5%, then you should contribute 5%.  You don't have to contribute the maximum allowed by the IRS, the idea is simply not to leave any free money on the table.  

Take the time to achieve these four steps before investing your money.  This will establish a healthy financial foundation in which you can build.  Once you achieve this foundation and begin investing, you will be able to allow your money the time it takes to grow and build your wealth.