Takeaway:
Investing is like a marathon that lasts a lifetime. Here are three steps to take before you begin.
Think of investing as a lifelong journey, much like a marathon. You can’t just jump into it like Forrest Gump; you need to train. To begin, it’s important to set a goal. Are you training for a half marathon or a full one? Perhaps you have your sights set on running cross-country? In that case, channel your inner Forrest and “Run, Forrest! Run!”
Next, evaluate your current fitness level. Can you run a few miles without any problems, or do you find yourself gasping for air after just one block? Just like a marathon runner would create a training regimen and fine-tune their diet, there are important initial actions to complete before starting to invest.
Let’s begin here:
Think of this as your motivational pep talk before you start your training!
1. Set your goals
Investing might feel overwhelming at first, but consider the potential rewards that await you in the future. What are your investment goals? And more importantly, what exciting plans do you have for all that money?
Do you want to buy a home? Become a shrimp boat captain? Ping pong pro? What do you want in the short, medium, and long term?
This exercise doesn’t have to be done solely in your mind. Get a piece of paper or your journal and see what you can come up with.
Here is a sample list to start:
Taking it one step further, you could estimate the cost for each goal. Have you thought about how much you’d need to save up for that shiny new kitchenware? And what about a down payment on a cozy starter house? Adding a tentative date to each goal can make them feel more tangible and exciting.
When making your list, you might come to the realization that not all goals are attainable. It’s okay to make some tradeoffs (#priorities). If you can’t splurge on designer jeans and a new couch, don’t worry, it’s normal. We all have to make difficult choices. Prioritizing your list can assist you in determining what truly matters to you and what you can do without.
It’s important to occasionally step back and remind yourself of the reasons you’re investing. By doing so, you’re actively working towards creating the life you envision for yourself in the future.
2. Pay off high-interest debt
A lot of people have a strong dislike for both running and paying bills. While it may be tempting to mix them together (such as running away from your bills), it’s more beneficial to address your debt promptly.
High-interest debt can be really harmful. You see, the interest on credit or debt can quickly get out of hand, and before you know it, you might find yourself in a worse financial state than before.
For example:
If you’re thinking about getting the new iPhone, the latest model with 128 GB storage will run you about $1000. Whether you decide to pay in cash or settle your credit card bill immediately, that $1000 is the complete amount you’ll need to pay, not including taxes, shipping, and potentially a data plan.
Let’s say you forget to pay your credit card bill in full by the due date. You might make the minimum payment or a bit more. In that situation, the $1000 charge can start to increase. If you make a $50 monthly payment and your credit card company charges 22% interest annually, it would take you 21 months to clear your debt.
By then, you will have paid $1000 (the price of the new phone) plus $200 in interest. Essentially, you’d end up paying about 20% more than the sticker price.
The larger the debt, the worst it gets.
Let’s paint a picture: you treat yourself to a $5,000 vacation and decide to put it on your credit card. Cha-ching! However, your credit card company isn’t so generous and charges you a hefty 22% interest. Now, you’re stuck making monthly payments of $200.
Brace yourself for the shocking reality: it will take you a whole 34 months to fully pay off that one-week vacation in Cancún. And to make matters worse, you’ll end up shelling out an additional $1,749 in interest. (Ugh!) Just imagine, you could’ve gone on another vacation with that extra cash.
Why focus on paying off high-interest debt before investing? Well, it’s because finding an investment that can outperform your debt is like a race between a sprinter and a bullet train – the sprinter is quick but not as quick as the train.
High-interest debt is to financial health what a healthy diet is to physical fitness when running a marathon. It’s a key component, but making adjustments can be tough and overwhelming for many.
Paying off debt with high interest rates should be your top priority if you want to get ready for investing.
3. Create an emergency fund
Have you ever seen those power bars that runners munch on during a marathon? Those are like their secret energy stash. I mean, they can’t just chow down on a chicken salad in the middle of the race, right?
As you navigate through your investing journey, it’s important to keep some extra energy in reserve, or a financial safety net. This is what we refer to as an emergency fund. It’s the money you can rely on when unexpected situations arise, such as your car breaking down, your new oven going up in flames, or experiencing a major setback. (Think losing your job, unexpected visits to the emergency room, or your mischievous pet deciding to munch on your computer.)
An emergency fund is like a financial safety net. It’s a stash of money that most people keep aside, usually enough to cover around 3 to 6 months of rent and living expenses. (Some people might have already dipped into this fund.)
When setting up your emergency fund, consider your living situation and financial circumstances. You can start small and increase it gradually, or choose a larger fund if you prefer a more cautious approach. Additionally, review your insurance coverage, such as health, life, and disability policies, to ensure they are tailored to your specific needs, taking into account factors like health conditions and number of dependents.
Like a runner who brings their phone and cash, emergency funds and insurance are there to assist you in times of need. They act as safety nets. Whatever your plan, it’s beneficial to have a cushion. Treat yourself to some power bars!
The marathon begins
Although the starting point of a marathon is the same for everyone, investing doesn’t operate under the same circumstances. Some of us may encounter more difficult situations. However, we can all adopt a similar approach to our training: getting well-fitting shoes, improving our diets, stocking up on energy gels, and going on practice runs.
Keep in mind that each person will have their own finishing time in the race, and there may be some who decide to drop out. But it’s the preparation leading up to race day that sets the foundation for a successful start.