It’s 2019 and I’m all about getting my coins together. I am a novice when it comes to investing and I figured a lot of my readers are too. To get me ready for all the money that is about to rain on me in 2019 (oh universe hear my words) I hit up my blogger pal Dr. Breathe Easy Finance (@drbreatheeasy on Twitter) for advice and he agreed to share some tips on what a newbie should do before jumping into investing.
This is a blog post I am so excited to have on Olliviette so keep reading if getting your finances right is a goal for 2019! Enjoy and don’t forget to pin this post for later!
We already established investing is important. Without investing, your money would be eaten away by inflation. In the USA, it is about 3% every year. Which means, if you have $1,000 in your bank today, that same money would only have a buying power of $700 in ten years. The only way to avoid that happening to you is to put your money to work for you.
A recent book I read, The Richest Man in Babylon, talked about letting your money work as slaves for you so you don’t have to work as a slave for money. In fact, let the children (interest) of your money also work for you as a slave too.
Investing can be simple or complicated, it depends on the resources that you have and your attitude towards investing. If you are reading this, there are a series of assumptions that I have. You are quite interested in investing, but you want to know how to get started.
There is a common saying in medicine, especially before performing a procedure. “Preparation is everything”. You don’t want to jump into any procedure without the right equipment or right preparation. Even, if you are the best surgeon in the world, you are bound to make mistakes. Investing is not different.
To start your investing journey on a solid foundation, there are 7 steps to take to make sure you are ready.
1 – Know your current financial situation
Your investment strategy, risk and technique would be different if you are making 40,000 a year versus making 100,000. A high-income earner can take a little bit more risk. I am a specialist doctor, I go a little bit wild with my risks. That is because it is easier to catch up if something goes wrong.
Before you start investing your money on any investment products, it is important to know how much you can spare every month or year for investment. The first step to take as a general rule is to focus on debt payment, at least the high-interest debts before you start investing. If you want the full version, I share more in my 12 toddler steps to financial freedom article.
Know how deep in debt you are if you have any. Calculate your income and expenses, figure out how much is left at the end of each month. Now proceed to stage 2.
2 – Have a decent emergency fund
After you have cleared your debt, your next goal should be to start saving up for an emergency fund. There are many schools of thought on that, however, the consensus is that 3-6 months of emergency fund is good enough.
To figure out how much you need for your emergency fund.
- Calculate how much you spend every month
- From there, save up 3x to 6x the amount.
We spend $5,000 dollars a month for example in our household. So technically our emergency fund should be between $15,000 – $30,000. We have about $15,000 to $50,000 depending on the time of the month. Like I said in step 1, your income level sometimes could cushion you a little. I am sure it is possible to get by with less if you make a lot, but those are a good rule of thumb.
If you own a house, then it is wise to stay on the higher end. This is another reason you should not be buying a house before having an emergency fund.
Note, that buying a new pair of shoes is not an emergency. I am talking about fire consumed your house and you escaped type of emergency.
After you have managed to do that then additional money that you saved can be used to invest.
3 – Protect yourself and your family first; yep even single people!
I know you are so excited to start investing. Show me the stocks and bonds and let me invest now. Hold your horses. Your preparation is not complete yet.
At this stage, you should already have health, life and disability insurance. Even if you are single, this is very important for you to have especially disability insurance.
I am not going to talk about health insurance, because, it is just silly not to have one. Your body is your money making machine. If you insure your car and do regular maintenance, but you don’t do the same with your body, that is not a wise decision.
The purpose of disability insurance is to protect your income. If something bad were to happen, you can retain your ability to generate money.
Life insurance is necessary. Even if you are single, I’ll say you need to get one too. The reason is that, the older you become, the more likely your medical history gets complicated, the less likely you will be insurable and the more expensive insurance becomes. Lock down a low rate today.
Make sure you get term and not whole life insurance. The step by step method to have a good financial pyramid talks about all the insurances in detail.
4 – Know your risk tolerance
Ok, so you have done everything in your power to protect yourself and your family. Now you need to determine in your risk level.
Are you a risky person or you love to play it slow and steady? These are questions you need to ask yourself. This determines what type of investment you go for. Low-cost index funds which are long term investments and real estate might be the right one for you if you are risk averse.
If you like to take big risks and you have the income for it, you can mix it up with short term investments.
If you are split between the two, you can go for stocks and then go for more stocks than bonds. The magic formula that is commonly used is “your age in bonds”. I have only 10% bonds, and I am 32. That is again, because of high income and I have many side hustles that bring me money including blogging.
*Stock is basically investing in a part of a company and you get to share their gains and losses. Stocks are high-risk investments with high reward.
*Bonds are often referred to as fixed-income securities because the lender can anticipate the exact amount of cash they will have received if a bond is held until maturity. They tend to be less risky, but fewer gains.
You can learn more about the basics of investing including stocks and bonds at one of my favorite sites, Bogleheads (I often reply to questions on here).
5 – Diversify your investment
Almost every financial expert encourages people to diversify their investments. Your investment needs to have a healthy mix of stock, bonds, and other assets if possible. So not only do you have to diversify in particular types of investment, but you also have to diversify the type.
For example, I do virtual investments like stocks and bonds and I use the 4 fund portfolio. This allows me to diversify into many companies. Refrain from just buying Amazon or any other single company.
Another example, invest in multiple sectors like real estate or start a business on the side.
The reason for all these is that when the market crashes, you can be insulated a bit more. Usually, when one sector goes down, the others go up. Although it’s possible to go into bad bear market or economic depression and everything goes down. However, that’s the best strategy to use.
Other information can be found in this article,
6 – Do your “due diligence” before you invest
Do not be affected by what we call “FOMO” otherwise known as fear of missing out. If an opportunity comes and you are not comfortable with it or not knowledgeable enough about it, let it pass. Another opportunity will come. This will prevent you from jumping into investment because others are doing it. For example, crypto currency. Many people lost their money as a result of FOMO.
If you are stuck, it is alright to seek advice from a professional in the beginning. However, the money is yours ultimately. Like one of my favorite saying, nobody cares about your money like you do. So grab some book and improve your knowledge.
7 Understand compound interest
Compound interest is the 8th wonder of the world – Albert Einstein.
What else do you need to convince you of the fact that it is the most powerful force in the universe of investing?
When you invest your money, not only does your principal money grows, the interest also grows along with it.
A good example is if you invest $100,000 right now, at an interest rate of 10%, how much do you think this money will become in 50 years? Even, if you do not add a single cent into the account.
A whopping $14.5 million dollars!!!! Now take that to the bank and get started with investing today.
Know your current financial situation, have an emergency fund, protect your family first i.e. life insurance, Know your risk level, diversify your investment, do your homework before you invest, and understand compound interest.
If you keep those basics down, you are ready to start the investing journey.
I’m so glad you made it to the end! Don’t feel discouraged if you’re not making as much coin as Dr. Breathe Easy Fianance, I’m not and I am still picking at the core message in this blog post. Just adapt the points to your income and start making better money decisions before you take the big step to investing.
Check out the various links in this post and for my UK babes, I’ve found even more help for broke (but badass) beauties in this post which breaks down investment basics some more, this article walks through the steps of investing in the UK in more detail, and this article that makes you feel ok if you only have £10 a month to invest.
This isn’t a one and done deal so keep pushing forward and growing throughout the year.
Don’t forget to pin this post for later and let me know your money goals for 2019 in the comments!