The basics. Everything starts with the basics. Personally, I’m pretty excited about dividend growth investing and achieving financial independence. I’m presuming you are too. But before one can embark on this journey, there is a whole universe of personal finance that must be mastered. But fear not, it’s really not that hard. If you’re determined and moderately intelligent (as I’m sure you are, as you’re reading this blog) you’ll blitz through this list in no time. Read on to discover what you need to master in order to build a solid foundation for your future investing success.
Presented below are most of the aspects of your personal financial life that you need to get sorted out and under control before you even begin investing.
1. Make a budget and track your income and expenses - It all starts here! You need to know how much money is coming in, how much money is going out, and where it’s going. There is no excuse for not tracking your expenses and making a budget. Just break out Excel, or if you’re poor or cheap, try OpenOffice or Google Drive‘s spreadsheet. There are plenty of programs out there that let you pull in your credit card and bank statements so that you can better track your spending. Or check out Mint.com which is a free online version of the same service.
2. Establish an emergency fund - Everyone needs an emergency fund. I would suggest that you target saving an amount of money equivalent to at least 3 months of living expenses or the price of a good used replacement car, whichever is higher. I’m shooting for a full year’s worth of living expenses, that way if layoffs come I’ll have a much bigger cash cushion to rest on as I’m scrambling for a new job. You don’t need to have the entire emergency fund funded before you start investing, but you do need to have a solid plan in place to build up your savings.
3. Tackle your debts - Consumer debt (e.g. credit card debt and car loans) often has interest rates that far exceeds the dividends and capital gains potential of almost any stock you can buy. Therefore, pay these off first. Otherwise, while you may own some great dividend growth stocks, you’re still pulling in a negative rate of return because of the crushing interest rates on your debt. Now you’ve got to tackle mortgage and student loan debt, which usually have lower interest rates but much larger balances. You don’t need to pay these off in full before you begin investing, but you do need to have a plan in place to ensure that they get knocked out. Once you’ve gotten yourself out of debt, don’t upgrade your lifestyle, start shoveling that money into your investment accounts.
4. Max the match in your 401(k) - Most 401(k) plans will match a certain portion of your contributions. For example, mine will match dollar for dollar the first 6% of my salary that I choose to invest in the plan. So you can bet that I put 6% of my salary into my 401(k).(*) That’s a 100% return on that money just for shoving money into the account. Then allocate the money to simple low-cost index fund and you’re set. Let’s review – 100% return just for saving some money and all the additional returns from the investment.
5. Start educating yourself - Go and read everything you can about investing, personal finance, individual stocks, etc. You don’t need to go get a degree in finance, but you need to start developing a basic understanding of the field. But don’t worry, these day’s there’s so much free information available online (such as this blog) that if you have time and curiosity, you will get up to speed in no time.
6. Establish a firm savings plan - If you want to succeed at achieving financial independence you need to establish a firm savings plan and make every effort to stick to it. You can scale your savings plan to achieve financial independence in as few or as many years as you want. You can weight it towards tax-deferred retirement accounts or taxable accounts. Whatever floats your boat. I’m shooting for early financial independence, so I’m trying to save 50% of my after tax income every year. Regardless of how aggressive you want to be, consistency is the key to success.
7. Open a brokerage account - I suppose this one should be obvious, but you’ll need to open a brokerage account in order to begin investing. Plenty of companies (e.g. Scottrade, eTrade, Zecco, and way more) offer accounts. Do some research and find one that you like. Open an account and deposit some money. Then start familiarizing yourself with all the various tools, features, and research capabilities offered by the site.
8. Other - The great catch all for everything else that I failed to mention before. Depending on your life situation you may need to consider insurance policies, college savings, etc.
(*) I don’t max out my 401(k) and IRA accounts because I want to achieve financial independence as soon as possible. Well before age 59&1/2 if possible. But if the match increases, I’ll invest more money as I don’t believe in leaving free money on the table.
Readers: How are you doing on the above checklist? What else do you think that people should take care of before they consider diving into the world of investing?