What to know before you start investing
Before you jump into investing, get a clear understanding of where your money is going. Here are a few things to consider.
Build an emergency fund
The goal for an emergency fund is to save enough money to cover your expenses for six to nine months. With this in place, you are prepared in the event you lose a job or come face-to-face with unexpected costs from home or car repairs or medical emergencies.
Make building an emergency fund a priority. It's a smart way to ease stress or concerns over some of life's unknown events. This is like insurance for your budget.
Understand and manage your debt
Classifying your existing debts is a good start. Most people have unproductive and productive debts.
Unproductive debt is debt that doesn't add to your income. It's not for investment and it is typically used to purchase items that depreciate in value over time. It's best to keep unproductive debt low. Examples of unproductive debt include:
- Other lifestyle items
Productive debt on the other hand, generates income. It works to help you build wealth by purchasing assets which typically appreciate in value and sometimes produce income that pays both the principle and interest on a loan. Examples of productive debt include:
- Rental properties
- Fine art
Pay down high interest debt
If your money is going toward excessive credit card debt or private loans, make a plan to figure out how and when you might pay those down. In the meantime, make smart decisions about how to keep investment opportunities in balance.
You don't have to have a full emergency fund and be debt free before you start investing. It helps to know where your money is going and to have a well thought out plan for investing.
Take in the insights from the opening chapter to set you up for wise investing.
Your chapter 1 checklist
- Watch the Are you ready? video.
- Download the Just the Facts: Investing worksheet.
- Using our calculator, take an assessment of your debt.
- Continue with the next chapter, Know When to Start Investing.