Finance/ Money Management/ Budgeting/ Investing

Don’t Invest Until You Have These in Place

You need a foundation for your investment before your castle collapse.

Investing your hard-earned cash and putting it into work is an exciting idea. But despite the excitement, there is more to be careful about. You will need a good foundation for a house, just like how you need a good foundation for your financial health.

1. Your Debt

What kind of debt are you currently holding? And how much?

As of Jan, 2022, the average interest rate of credit cards is around 16%, which is quite a deal when you consider Warren Buffett’s average return is 20%.

Unless you can invest and perform as well as Buffet and maintain that for the years to come, it is far easier to get rid of your debt. After all, there is no way to know whether the stock market will keep performing great (hint: usually not as good as you will hope, but not as bad as you dread, either).

If you have more than one card, are you tracking how much are you owing the banks? Gather all of your statements and list every debt there is and start comparing them.

To make the most mathematical sense, you should tackle the debt with the highest interest rate while paying the minimum for the rest of your debts (also called ‘the avalanche method’).

But for some people, they prefer to have easy wins at the start and that will help them to stay on track. For these people, they will choose to tackle the debt with the lowest amount and work towards the larger debt. Every win can act as the vital forward momentum that is worth the extra interest they will end up paying.

For you, feel free to try both methods out and pick the one you enjoy more. You can try the avalanche method first (it will allow you to pay less interest after all), if it is really a stretch for you, you can always switch to the snowball method.

2. Your Emergency Fund

While you are tackling your debt, you should also give some thought to your emergency fund.

This is an amount of money you put aside for only life-and-death situations.

Typically, financial advisors recommend a minimum of 6-month’s worth of basic expenses saved up. But for most people, that can be a far fetch goal.

Yet, you can’t go without a safety net to fall back on either. Depending on your chosen investment vehicle, usually, your cash will stay there for at least some time, say three to five years.

If you don’t have cash on hand, and if your car needed an immediate fix, it is likely you will have to get it on your card. This is not an ideal case when your aim is to gain more, not to pay extra credit card interest when you don’t have to.

Even if your investment can be liquidated (fancy word to say selling off) easily, it may also not be a preferable case. It is hard to predict how the stock market will act, and even harder to know how it will be performing when you meet an emergency. You may have to sell at a loss, which may not make this case any better than using your credit card.

When you are working hard at getting rid of your debt, the last thing you want is to have them accumulating again.

Therefore, as a minimum, you should have a $1000 emergency fund as a start. This is an amount not too far away for the general public while good enough for most common emergencies.

That $1000 should be safely tucked away in a place where you can access easily and quickly with minimal risk. But no, putting it in a safe in your home is still not the best idea.

This money will most likely sit in your bank account earning a very low interest rate that can be frustrating at times. But consider it a hedge against the scary credit card debt you may have to face and be grateful for it.

So, how are you going to get the $1000 if you don’t have it yet? And you are also paying down your debt, right?

3. Your budget

This is where you will plan out where you will spend your money every two weeks, or month, depending on how your income works.

If you have a day job, then you should know how much and when the cash will be coming in. And if your income fluctuates, take a low month and base your planning on that (you have been tracking to know which months are worse, right?)

What you need vs. What you think you need (your wants)

After you know your income, list out things you can’t live without. I mean you may actually die from running out of that thing, not feeling like you are dead. Think rent, transport (no, not a Ferrari), food. You probably wouldn’t and shouldn’t have too long a list here, if it is long, be honest with yourself.

You total the amount from the above entries, then you add a slice for your emergency fund. Feel free to start small, but you have to allocate at least something there.

Then you get to keep a tiny slice for yourself. It is hard to keep living at a minimum and you should still be able to have some fun at times (maybe celebrating how you’ve followed your budget well). Don’t go overboard though. To put a limit on yourself, what you get to spend on yourself has to be less than what you keep as your emergency fund.

If you are still having credit card debt or other debt that are at an interest rate higher than 5%, you may want to put everything else into tackling debt. You are doing your future self a favor and remember, we’ve already allocated money for some entertainment.

And if you have cleaned out all of your debt, keep pouring into your emergency fund until you hit the number ($1000, or a number you have set beforehand).

Your future self is going to thank you when they don’t have to run around gathering funds to fix something. Though I hope you won’t ever need your emergency fund, that’s for sure.

Now after you have the foundation set up, you can start dipping your toes into the water of investment.

As mentioned above, you should expect your money to stay wherever you send them to work for at least five years, so remember to not invest money you can’t afford to lose!

And other than starting with your investment, remember to also grow your emergency fund at the same time. This may be a time for you to evaluate how much of it you will need for you to be able to sleep well at night.

$1000 is just a start, but now that you have it in place, you know that you can achieve your goal when you’ve set your heart at it, right?

Act now!

1. Make a list of your debt (if any)

2. Set a plan to pay your debt off

3. Set a budget

4. Act as planned

5. ? (keep at it)

6. Basic emergency fund achieved!