Before you can even consider buying stocks, bonds, real estate, or even starting a small business, it’s important that you get financially fit first. You have to see to manage your finances and allocate money where necessary so that when you finally do begin to invest, you won’t have to suffer setbacks because you were ill-prepared.
Here are the things you need to do to ensure that you are financially fit before you start investing:
Set up your Emergency Fund
We all know that life can throw us lemons when we would rather that it gives us chocolates. Medical emergencies, the loss of a job, or a natural calamity that damages our homes—all these are possibilities that we must be prepared for. To tide you over for these eventualities, you should have at least three months of living expenses stashed in a very accessible account. You could put it in a regular savings account or better yet in a money market fund so that you get the benefit of higher returns. When you have this emergency fund in place, you have something to tide you over in the event of emergencies.
What happens if you don’t take care of this first and plunge right ahead into investing? You could be forced to sell your stocks, real estate, and even your business at a losing price. In addition, you also find yourself hit with sky high transaction costs and taxes when you let go of these items at such short notice. So the best way to ensure that you will continue reaping the benefits of your investments even when you are laid off is to ensure that you have three to six months of emergency money to tide you while you are looking for a new job.
Pay Down your Debts
Now that you have done your homework and educated yourself about investing, you’re probably itching to set up a meeting with a broker your friend recommended. Hold your horses for a minute and ask yourself: Do I have existing debts that I need to pay off? If you have high-interest consumer debts such as those that you have from credit cards, it would be a good idea to take care of these first.
Think about it: If you are slapped with as much as 20 percent (or more) in annual interest in your credit card and it keeps piling up because you can only pay the minimum each month then any potential earnings that your investments will gain will just be swallowed up by the interest rate of your credit card. It’s a losing proposition. Before you think about buying stocks or bonds, evaluate how much debt you have and settle it first.
Should you pay your mortgage earlier? This really depends on your personal circumstances and the type of mortgage you have acquired. If good money management habits have given you the extra money to pay your mortgage faster, you can certainly do so. However, you have to keep in mind that mortgages usually have lower interest rates than credit card debt and with fixed-rate mortgages they remain constant until you have paid off your loan. So there is no rush to pay mortgage payments.
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