This is the first installment in what will be a continuing series on tips for investing for beginners. I am not an expert, but I think I can shed some light on the topic because it was only a few years ago that I myself was a beginner. Rather than getting discourse from an investment expert who has worked in the field for the last thirty years, I can remember some of the initial questions that I had and hopefully I can answer some of them for you.
Where to Start?
The first question that I needed the answer to was where to start. I had fought so long and hard to get out of debt to the point that now that I actually had money to invest, “how and where to invest” was completely uncharted waters for me.
But I’m not going to focus on these questions in this post. Instead, I want to discuss two key points that you need to consider before moving forward with investing:
1. Make Sure You are Completely Out of Debt
If you are carrying credit card balances from which you incur double digit figures in interest, you need to eliminate those before you even think of investing. The math just isn’t there and you’re taking on too much risk. Now do I actually mean completely out of debt? Let me qualify what I just said. When I say completely out of debt, that is somewhat of a relative term. I have a decent investment portfolio built up yet I still pay the mortgage on my house and, actually, I am still paying off a large amount in student loan debt. So, does that mean I should stop all investing until my house and my (wife’s) education are paid off? Of course not. If you looked at things with that narrow a mindset, you’d probably never be able to invest anything your entire life.
My house is an investment that holds its value and will hopefully increase in value over a long period of time, so it makes sense to be investing while I am paying it off. What I am instead a proponent of, and what we recommend here at Money Crashers, is that you pay off all of your consumer debt (car loans, credit cards, student loans, etc) before doing heavy investing. In my situation, I’m paying really low interest on the student loan, and we’re not getting any younger, so I want to continue to invest while we pay off the last portion of our consumer debt. I’m at a point where my debt is always decreasing and I am in full control of my finances even though I am technically in debt with a mortgage and student loan.
2. Pay Yourself
The second point is that you also want to make sure you are paying yourself before you invest as well. By this, I mean do not become a slave to your 401K plan. The amount you can contribute to this program is variable, so you can choose what you set aside. Just make sure you have “enough” money before you shoot it over to your investment. There is no sense in living like a pauper your whole life only to save an extra $50 per week to put towards retirement. The point of a 401K plan is to be able to enjoy your retirement, but if you don’t enjoy your life living up to that retirement, then what’s the point? That life leading up to retirement is a lot longer than your retirement will be, don’t you think?
In closing, getting yourself on a good solid investing program is key to any person’s long term financial success, but only when you are at the point in your life where you have some flexibility in your finances. In future posts, we will discuss the “hows” and “whys” and “wheres” in detail. The first lesson here is that before you begin to think about investing, you should basically be out of debt, and you should also allow yourself the money you need to live your current life at a level you are comfortable with.
As always, your thoughts and feedback are very helpful.