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My Financial Independence Journey » Investing, Reflections » 8 Things To Do Before You Start Investing (or most of personal finance summed up in one post)

8 Things To Do Before You Start Investing (or most of personal finance summed up in one post)

1280927_ticked_checkboxThe 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 ‘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 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?

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26 Responses to "8 Things To Do Before You Start Investing (or most of personal finance summed up in one post)"

  1. A great list for sure! Our family has a budget, but we don’t do a great job of tracking the little costs that go through on the debit card and can add up after a while! This post has re awakened me to that!
    The only thing I would ad is to hold an annual financial review (I do this monthly) and utilize an online financial/retirement calculator to see how you are tracking to your goals.

    1. Servicekaizen,

      An annual financial review is a good idea. I never thought about it before because I’m constantly reviewing my finances every time I pay a bill or otherwise edit my spreadsheets. But if I had a family, I would probably have to.

  2. Good information here. I would suggest that for people who don’t want to get too hands on with trading stocks actively to open a Vanguard account instead of e*Trade or Scottrade. Low-cost mutual funds or ETFs will allow you to buy wealth in a less volatile way.

    1. Moneyseed,

      While I prefer dividend growth investing, financial independence can be obtained with low cost index funds or ETFs as well. One day I need to write more about that as an option.

      1. I will definitely write one in the not too distant future as well. Important stuff!

  3. Headed Home says:

    Good list. I’d say to build your emergency fund completely before investing, but that’s small potatoes as a tweak. Maybe get the employer match before paying off debt, since the return of 100% beats the interest rate on most any credit card.

    1. Headed Home,

      I would do everything in my power to grab the employer match and pay off debt. I think of them more as a both/and scenario.

      Regarding emergency funds, it depends how much you have saved and what your end goal is. If your emergency fund is $0, then definitely build that up first. But if you’ve got a few months of expenses saved, then you can build the emergency fund and invest all at the same time.

  4. Pauline says:

    I am doing pretty well overall, but like you stopped funding retirement accounts to achieve financial independence. On my last job I didn’t take the match because I was saving aggressively towards a property down payment, that is currently giving me a two digits return on the invested money after mortgage and fees. The match is really sweet though. btw congrats on the simple dollar mention! I hope it boosts your stats.

    1. Pauline,

      As I understand it, you’ve actually retired, as in not working for money anymore (outside of any blog income). If that was my goal, I’d pass up the match too. On the other hand, I don’t think passing up the match is warranted if you’re just career shifting (and calling it retirement).

      The Simple Dollar mention took me completely by surprise. I didn’t even think that was my best work, and today’s traffic is off the crazy for my little blog. I am once again humbled.

  5. says:

    You pretty much nailed it here my friend.

    Avoid debt, save heavily and invest the difference. I fully believe that one’s ability to save a high percentage of net income is far more important than the ability to “beat the market”. This is especially true for someone who wants to achieve financial independence or retirement at an early age, as time’s immense powers is somewhat taken out of the equation in these cases.

    I’ve done everything on that list and I’d say it’s treating me pretty well so far. Once you gain control over your finances a sense of euphoria takes over. It feels great!

    Best wishes.

    1. Most of us are never going to beat the market. We have neither the insider information, nor the luck to pull it off. You are correct about the high savings rate. The quicker you want financial independence, the greater the effect of your saving rate compared to your rate of return.

  6. The Stoic says:

    Like DM I’ve followed all of your recommendations over the past two years and it has made a noticeable difference in my financial life. I don’t have a fund set aside for emergencies but I do keep enough cash on hand to cover the unexpected. I think once you eliminate the debt, know what your running expenses are, and have a little savings put back you can weather most storms that come your way. Great list for the beginning investor!

  7. Laurie says:

    Great post. I especially love the tip on tracking your spending. That has been life-changing for us!

    1. Laurie,

      Thanks for stopping by. Tracking my spending was pretty life changing for me too. It basically allowed me to get serious about saving money and pursuing financial independence. If you can’t measure and track it, you can’t control it.

  8. Integrator says:

    I don’t have an explicit emergency fund set aside (I’m relying in my dividends to fill that role), but otherwise we have most of the things covered. The one other thing I’d add is set some goals, whether they be short term (ie savings $x per month), and long term ($x in income/net worth by 20xx). I think that really helps keep focus and give you something to work towards and measure progress. Having something that I can measure against has really helped me, but then again I’m a finance guy, so I’ve always loved measuring and tracking against things! If you don’t know where you want to go, its hard to plan for how you’ll get there.

    1. Integrator,

      I wouldn’t rely on dividends alone. If something happens to my dividend streams, then the emergency fund kicks in keep the bills paid while I can work to repair the other income streams.

      Setting goals is critical. I agree with you 100%. But there’s an art to setting goals. They have to be both specific and achievable. Otherwise, you’re setting yourself up for failure.

  9. Great list. I have learned to love Google spreadsheets recently. We are building up passive income, mainly with rental properties right now. Hopefully we can replace our salary income within the next 10-12 years.

    1. Kim,

      I like Google Spreadsheets too. But I wish they would put the extra effort into the product to make it a fully functional and robust spreadsheet.

      Like downloading stock information into Google sheets. You can do it, but for some reason you can’t download very many parameters. A few tweaks and it would be a amazing, but as it is, it’s more like a toy.

  10. [...] My Journey to Financial Independence: 8 Things To Do Before You Start Investing [...]

  11. I can say that I’ve done steps 1-7 and now it’s just letting time do it’s thing so I can continue to build up my savings. The first step anyone trying to go get more control of their finances is appropriately listed first. Luckily I’m a natural saver so I didn’t really splurge on much before I started tracking every thing, but I couldn’t have told you jack about my spending. It’s really eye-opening once you track every penny coming in and out of your life for a while.

    1. JC,

      I’m a natural saver too. But in grad school, I made so little that even small expenses were killing me. Once I started tracking my expenses all of a sudden I stopped having to bleed my savings to make ends meet. Many years later, I’m still obsessively tracking everything.

  12. says:

    I will add also to get or purchase insurance in order to protect you as the breadwinner of the family before throwing money for investment. Insurance will give assurance to your love ones when you die and if you cannot go back to work due to accident.

    1. Thanks for stopping by.

      Certainly, insurance is worth considering depending on where you are in life. I’m single, so don’t really worry about insurance at all. But if your income is needed to support a family, then insurance shopping should be on that list.

      Although maybe not in all circumstances. If you and your spouse both pull in a lot of money such that one of you could pass away but the family would still have enough money to live on, then insurance may be superfluous.

  13. [...] post on 8 things to do before you start investing was included in the Carnival of [...]

  14. Catccc says:

    First time visitor here! Question, I don’t understand why wanting to retire early prevents means you should not max out retirement accounts, esp tax advantageous ones!

    1. MFIJ says:

      Basically you only have a finite amount of money. You have two choices, you can put that money into a taxable account that you can access any time. Or you can put that money into a tax deferred account that you can’t access until you’re 59&1/2. The more money that you put into taxable accounts, the faster you can retire. Retiring early doesn’t prevent you from using tax deferred accounts, but it’s impossible to retire early if most of your savings are in tax deferred accounts. So you have to figure out the right balance for you.


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