People are often excited about investing. And that makes perfect sense. Investing is about the future, making more money and hopefully achieving all those nice financial goals (owning your house, travelling more).
Investing is the ‘dessert’ in a well-rounded ‘financial planning meal’. And the steps that come before it are far less exciting.
But it would be a mistake to skip the earlier steps. If you do, then it’s likely that your attempt to invest is going to be like trying to fill up a bucket with a bunch of holes in it.
Often, someone that hasn’t aligned their budget for success or hasn’t started saving but goes directly into investing causes a lot of issues. When a major emergency happens, those clients tend to be ill-equipped to deal with it and end up withdrawing from a retirement account that is either earning well, or could even be down and really affecting their growth potential.
Debt – The Leak in Your Bucket
The biggest ‘hole’ in most peoples’ plans is debt. Debt is an obligation to pay someone else back for something. That someone else is usually a bank or other lender. And to make lending you money worth their time and risk they will charge you interest. Interest is simple: it’s the ‘price’ you pay for having debt.
A lot of debt comes with a very high interest cost. The major sources of high cost interest are:
- Credit cards
- Personal loans
- Car loans
If you are paying back debt with high interest costs you have a big hole in your bucket. That means for anyone with any debt, the first goal before investing should be to get rid of that debt and plug the hole in their savings bucket.
Once you pay off your debt or get it under control, then you automatically have more to save. We provide a helpful debt elimination strategy here.
Unexpected Bills – Having A Plan
Most of us struggle to save for a rainy day. The cost of living goes up every year, and wages sometimes stay flat. That’s why unexpected bills or having to take a week or two off work because of illness (or to care for a sick family member) can really hurt.
What’s worse is that the unexpected bill often means that we have to put it on our credit card or take out a personal loan. But if you’ve just fixed that hole in your plan, you won’t want to open it back up again.
That’s where “emergency savings” comes in. This is a bank account just for that rainy-day emergency.
That means that once you have it you have an emergency savings, once a big expense pops up you can go to your savings to pay and pay the expense without worrying. Then, all you need to do is go back to saving until you’re back at your target amount. You can create a budget that helps you do this using plenty of different methods and tools.
We provided a free budget calculator here.
Making it Automatic
Does this sound like it might be too hard? Don’t worry, you’re not the only person who feels that way. But with the right help, setting all of this up is fairly simple, and only needs to be done once.
Once completed, you’ve got a wonderful advantage: you can just keep working and earning with clear targets to eliminate your debt and put away enough money in your emergency savings.
Once that’s all done, then it’s time to think about growing how much you have. If it helps, think of investing like the ‘dessert’ to your financial planning ‘meal’. It comes last, but it’s worth the wait to do it right.
Getting Some Help
Doing these steps in a way that works for you can set you and your family up for years. One way to make sure you are doing it the right way is to speak with a qualified, trusted financial advisor.