One of the most important first steps for a beginning trader or investor to make is to have money to invest. That may sound like it is too simple to consider, but many potential investors spend more time wishing they could invest rather than doing something about it. “You have to have money to make money” is a cliché because it tends to be true and therefore people repeat it often. Focusing on having money to invest must be the true first step. While studying the basics of how to invest, where to invest and what to invest in, an investor must spend time saving, but only if a goal is well planned will an investor meet those goals sooner.
More than anyone, beginning investors must pick their focus and stay with it. Splitting financial goals will slow your progress and make it so you don’t see the progress as much. Many people want to invest and create a solid stream of passive income, but don’t take the time to focus their savings in one direction before trying to reach a second or third goal. This ends up being discouraging and causes many “would be investors” to give up before they get there and possibly even switching to using (gasp!) credit card debt. Saving for a new house, a new car and an investment account at the same time will only slow you from reaching each goal.
Like any project, you must prioritize. To prioritize where you should direct your money, make a list of all of your “big ticket” items and rank them in order. If you want to buy a house, save for it and pick up on investing next or go for an investing mark to hit before going for the house down payment. For example, a new investor could aim for $10,000 in investments and then save $25,000 for house. After having a relatively small investment account to start working and having a house that will hopefully appreciate the next step can be to grow your investments to $20,000 and then think about using $5,000 for a car before going hardcore and taking your investing account to $50,000. Eventually the investments will grow even faster than you can contribute new funds. This will allow you to fund your other purchases with passive income, not just fund the new items from income you receive from you wages job. Goals will be easier to reach because you have focused all resources towards one goal.
The steps my wife and I followed went in this order which kept us motivated since we continually met financial goals:
1. Pay off credit cards – Having credit card debt is the opposite of investing. If you are paying a company interest on your credit card you are paying extra for every purchase and increasing your stress level every time the bill arrives in your mailbox.
2. Create a savings account for emergencies – I’ve heard people say they don’t want to use their savings to pay their credit cards off because they might need the cash in an emergency. That thought process is not logical. The credit cards should be your emergency tool, not the cash. For every month you pay interest on your credit card debt, that’s less money you can use to fund your own projects as opposed to funding the credit card companies’ projects. A savings account is required before an investing account because investments can fluctuate year to year and in the short run you don’t want to be stuck withdrawing money from your investments if they are down temporarily.
3. Start your investing account – This account can invest in individual stocks, ETFs or even mutual funds. We set a goal of $5,000 to start with because we were anxious to buy a house together.
4. Buy a home – Owning a home can be expensive with the upkeep that comes with it, but the security of knowing your mortgage payment is the same every year is well worth it compared to renting. This is especially true if you can also buy a house that appreciates.
5. Increase your investing account balance – Set a new goal for your investing account. Make it something you can reach within a couple of years. This goal will vary depending on your disposable income. Whether it is $10,000 or $20,000, be sure you reach that mark before making other large purchases.
6. Take a break and buy some fun small ticket items. These can be anything from that iPod you’ve been eyeing or a new suit or dress, etc. Whatever makes you feel good is the right reward for saving as you have so far. Without rewarding yourself in between goals you can become discouraged and loose focus.
7. Buy a new car – From time to time a new car has to come into your budget. Work up a good down payment to lower your monthly expenses and the amount of interest you’ll end up paying the bank. If you can maintain your focus and goals, don’t buy a fancy car. You subtract every dollar you spend over a less expensive car from the investment goals you are targeting in the end, not to mention the interest on that more expensive car will further suck the cash flow from your plans.
8. Increase your investing account balance – This is a recurring theme. Going back to the investment account between each new goal gives you the opportunity to reach your goals more quickly. Where earlier it might have taken a year or two to grow your account by $5,000, the growth of the account can add that much alone. The growth in an average year is almost 10% for the broad stock market. That means that in an account worth $50,000 will grow to $55,000 by the end of the year with you having to add one dollar. When you add your own $5,000 investment that year you end up with a balance of $60,000 by the end of the year.
From there you have no reason to look back. You’ve now paved your way to a stress free financial future.