Here’s a simple truth that most people don’t understand: Not everyone should be an investor. At least, not right now. It’s not because they aren’t capable of learning how to be an investor, I believe everyone Can Be an investor, it’s that they haven’t followed the necessary steps to become an able investor.
They may have too much debt, or no safety account, or maybe they spend every dollar they earn on the newest and greatest gadget. Whatever the barrier is, it likely means they aren’t ready. The good news is it’s simple to get yourself ready to become an investor, you just need to follow some basic rules first. Here are the five most important steps you need to take before you invest:
Eliminate your Debt
This is the most important step you will take towards starting your investments, and ultimately, reaching your retirement goal. You need to make the interest on your money work for you, Debt does the exact opposite. Let me explain… Let’s say the average market return is 8% (Which it is) now let’s say you have credit card debt that has an interest payment of 18%. That still gives you a negative interest rate of 10%...
You can quickly see how you will be fighting a losing battle when you try to invest at a faster rate than your debt will grow. You would need to achieve a return higher than 18% to even start to make money. This is why it’s crucial to first eliminate all your debts that are above 5%.
Pay it off as fast and as often as you can, and while you’re doing that, you can continue to learn how to increase your return as an investor so you can start making money faster when you’ve finished paying off the debt. Do not do any other step until you’ve completed this one.
2. Build a Safety net
Life is always interesting. Because of this, it’s very difficult if not impossible to predict what will happen in the future. The one thing we can do is prepare, for any crazy $&%* it may throw our way. Whether it’s job loss, or an injury, we need to have a safety cushion to protect ourselves against the randomness that life throws our way. To do this we can start to accumulate an emergency fund.
Most people recommend saving enough to last you 6 month with no other income. You can decide whether to have more or less than this, but just make sure that money is in a liquid asset. In other words, make sure it’s very easy for you to cash it out at any time to use as needed, and don't touch this fund no matter how badly you want to buy that shiny new toy.
Remember, we can always expect the best, but we should also prepare for the worst. This will make the worst event, not be as bad as it could have been if you didn’t prepare.
Side note: This can be part of your investments, as long as it’s in an extremely easy to liquidate asset such as an ETF or Index Fund or individual stocks. Just know that this can take up to 3 days to get your money.
3. Focus on your Net Worth
You need to change your focus from what you have in your saving or chequings account, and instead focus on your total net worth. For example, if you have a $100,000 in your house and a car you can sell for $5,000 but you also have a student loan of $50,000 then your total net worth is $55,000. Once you eliminate that debt, your net worth quickly increase to $105,000 and continues to grow as you continue to save and invest your money.
Changing your thinking to working toward growing your net worth, does a number of beneficial things:
First, it changes your mindset from short-term to long-term, allowing you to focus on your end goal, and not get caught up in trivial spending habits. (no, those new toys will not increase your net worth).
Second, it helps you to focus on eliminating debt. The elimination of debt increases your net worth dollar for dollar creating on of the largest impacts you can have.
Third, it helps you focus on saving and investing. Once you’ve eliminated your high interest debt, anything you save is added to your overall net worth. Now what you want to do is grow that money so it works for you, and with investing that’s exactly what you’ll do.
Once you’ve changed your focus to increasing your net worth, you’ll start to get excited with every dollar you save and get better and saving more of it. The more you can save, the more you can invest, the more you can invest the faster you’ll see your net worth grow. That’s when things will really start to get exciting for you.
4. Set your Goals, Write them Down!
Be as specific as possible when you decide the amount you will need for retirement. Ask yourself specific questions like: “will our house be paid off?” and “How much do we need to live a great life in retirement”. Work your way through the calculation to find the exact number you need, then move it a bit higher. You always want a little wiggle room to be able to do the things you enjoy. It extremely important that you WRITE IT DOWN! If you don’t write down your objective then it’s just a dream.
Once you write it down it becomes a goal, and when it’s a goal you’re better able to see yourself taking the necessary steps in the direction of achieving that goal, and living the amazing life that you’ve always wanted. The exciting part is that you get to decide exactly the lifestyle you will be living. No matter how ambitious your goal may be, there is always a way to get there. So take off the safety belt and let yourself dream BIG. and then work everyday to achieve that dream.
In other words we need to define the ‘Why’. make sure it’s compelling and something that will make you, and keep you motivated. Make it big, and audacious. Put it on your fridge, and remind yourself what you're working towards each day. Stay focused, stay on path, and your goals will be in sight quicker than you thought possible.
5. Save Like a Maniac
Save save save, and then save some more. This is one of the biggest steps you can take towards your financial freedom (if that’s your goal). It’s what will give you the biggest acceleration in reaching those big goals you set for yourself.
Think of it like this:
Spending $1,000 today is spending $32,000 of your future money. That future you will be pretty pissed if you spend $32,000 just to buy a shinier TV. This is exactly how Compounding works. It grows your money over time so that you have much more of if then you put it. Each dollar you save grows into more dollars, which grow into more dollars. The more you can save, the more you will have. The longer you can keep that money growing for you, the larger the impact will be.
So, the next time you feel that itch to buy the newest toy, remember how much you're actually spending, and then save that money instead. The future you will thank you, and you’ll feel great about your choice.
Conclusion
If you can manage to do these 5 things:
Eliminate high interest Debt
Build a Safety Net
Change your focus to Net Worth
Set your goal, Write it down
Save like a Maniac
Then we’re well on our way to becoming investors, but we must first invest in ourselves before we can begin to invest our money.
This means getting yourself prepared by doing those five things above, with specific emphasis on paying off those high interest debts. Once you’ve set your mind and your wallet to the task, you can move onto the next step:
Learning how to actually invest!
The best part is that we can learn how to invest while we tick off this list. Getting ourselves prepared for the day when we finally put our money to work for us. That’s exactly what I’ll be teaching here. It’s going to be fun!
Until next time,
Thanks for being awesome!
~Ryan Chudyk~
PS.
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