Trent Hamm at “The Simple Dollar” blog has an interesting article titled “10 things you need to do before you start investing“. I agree with much of the article. In particular:
- Work out what you want from your life. Everybody has to make trade-offs, and the aim is to make decisions that reflect your priorities. To make these decisions you need to know your priorities.
Money can help or hinder you, so it’s a big part of the equation. Some recurring themes: own a home; educate your children; become financially independent.
Fair enough, but there are many different types of homes, educations, and definitions of “financially independent”. What suits you?
And if you’re in a relationship, it’s important that you and your partner are on the same page.
- When it comes to your financial life, your net worth is the key metric.
I tend towards excluding lifestyle assets other than your home from this calculation. I even exclude cars. Why? Because for the most part, the type of car you drive is a consumption decision. It makes me think twice about buying that Porsche.
- Pay off your high-interest debts.
Credit cards are a prime example. If you’re paying interest at 15%, paying off that debt is a guaranteed, risk-free return. You won’t get that anywhere else.
- Wean yourself off your worst spending habits.
If you want something, consider: waiting a bit, renting it, borrowing it, finding what else you have that might do the trick. Remember that every dollar you spend, is gone forever.
- Once you’ve done all of the above, if you have any other debts (including a mortgage) consider doing everything you can to pay it off. If you can do it a year or ten early, that will have a huge impact on your future outcome. And remember – the interest you’re repaying is pre-tax and risk-free. It’s a great deal.
Investing is an important part of becoming financially independent and having a comfortable retirement. But it’s not the first step. Especially for people getting started in their professional lives, investing is secondary to knowing what you want and value; focusing on the right metrics; debt and cash management; and being mindful of your spending habits.
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You need to be in a position to have funds to invest, in order to invest.