8 Money Moves to Make Before You Start Investing


I'm a staunch advocate for investing — especially if the alternative is piling up money in a savings account just to have "savings." Savings are great, but you only need so much in that offensively low-interest account. Put the excess to work, hopefully making even more money out of your investment. Before you take that plunge, however, there are a few financial matters you need to mind.

1. Organize Your Budget and Expenses

If you're considering making an investment — whatever it may be — you should have a solid handle on how much money is coming in and going out on a monthly basis. You want to make sure you can afford the investment without teetering on the edge of debt, but this also is a good time to find any weak spots in your budget so you can address them accordingly. Online money-tracking services like Mint.com can make this task much easier on you, and help you stay on track over the long term.

"When you know where your money goes, you are in control and can be thoughtful about aligning spending with priorities," says Carla Dearing CEO of SUM180, an online financial planning service. "Mint, for example, gives you complete access to your data through the website and your mobile device, whether you use iOS or Android. Better yet, Mint keeps an eye on your money for you. It even sends alerts to remind you to pay your bills or when you go over budget."

2. Get That Emergency Fund in Order — Stat!

In almost every "money moves" article I write, the "emergency fund" usually pops up somewhere. That's because it's a critical and indispensable part of your overall financial picture. You should have a sizable cushion in the bank to cover life's little mishaps, and that "should" becomes a "must" when you add investing to the equation. If you don't have an emergency fund, you have no business investing — bottom line.

Just how much dough are we talking for an emergency fund to be considered satisfactory? Six times your monthly expenses, according to Dearing.

"Be disciplined about saving a little every month until your emergency fund is where it needs to be, even if it means sacrificing little luxuries once in a while," she says. "Remember to replenish the account every time you use it. Having your cushion ready whenever you need it will give you a great sense of security and freedom. It will also free you up to work on other savings goals without getting derailed by unexpected expenses."

3. Pay Off Your High-Interest Debts

You don't need to be completely out of debt before you start investing. Many financial advisers argue that you should be debt free before you start investing, but that's just not true. Most people don't pay off their homes for up to 30 years, and you wouldn't want to wait that long before you start a retirement fund.

You should, however, pay off your high-interest debts. They'll drag you down faster than the Titanic.

"Whether it's a credit card or student loan, it doesn't make any sense to invest and make a market average return of 7% annually while you're paying 20% on credit debt," says Nick Braun, founder of a pet insurance company. "Pay off your high-interest debts first, then start using excess income to save for the future."

See also: Fastest Way to Pay Off Your Credit Card Debt

4. Contribute to Your Retirement Savings

Retirement savings is an investment. It may not seem like it now, because what you're funding seems so far away — but you'll see it as such when you reach retirement age. Which is why, before you start throwing money at other investment opportunities, you need to invest in yourself. If you don't have a retirement account set up yet, make that a priority. If you have one currently, like a 401K, for instance, take advantage of free, pretax contribution opportunities where available, like matching funds from your employer. Then max those contributions out so you don't miss a single cent.

5. Contribute to an HSA

If you have a health insurance policy that comes with a qualifying Health Savings Account, take full advantage of it and fully fund it.

"Most contributions are tax-deductible, and withdrawals to pay qualifying medical expenses — at any time in life — are tax-free," explains Kevin Gallegos, vice president of Freedom Financial Network in Phoenix. "These accounts are essentially emergency funds devoted to health care costs, and so savings have a double benefit of tax relief and savings."

6. Refinance Your Student Loans

Are student loans holding you back from building your savings or investment accounts or from making other types of investments? Free up some of your budget by refinancing your loans for a lower monthly payment.

"The average Class of 2016 graduate owes more than $37,000 in student loan debt," says financial expert Michael Blattman, professor at University of Maryland. "With 43 million borrowers nationwide, Americans owe nearly $1.3 trillion in student loan debt. Individually, this crushing debt delays borrowers' life decisions, such as getting married, investing in the stock market, buying a house, or having children. Collectively, it's hampering the U.S. economy."

You don't, however, have to be part of these statistics. Take back some of your financial freedom by making a call to your loan provider(s) to discuss refinance options that are right for you.

7. Get Started on a Taxable Investment Portfolio

After you've maxed out your retirement accounts, Dearing suggests starting a taxable investment portfolio. You can get started investing with just a few simple steps.

To get set up, call one of the high-quality, low-fee money management companies, like Vanguard, Fidelity, or T. Rowe Price, tell them about yourself, and ask them to tell you what type of account or fund you need, and what minimum investment requirements apply. These companies, which are the gold standard in the financial services industry, are extremely knowledgeable and committed to serving their clients (who, in the case of Vanguard, are also their shareholders).

"Companies like this get you started with a comprehensive, diversified, low-cost fund that will serve you well as a beginning investor," says Dearing. "Follow their recommendations and you won't go wrong."

8. Set Savings Goals for Your Taxable Investment Portfolio

Once you have your taxable investment portfolio established, set goals — $10,000, then $25,000 and, eventually, $100,000.

"When you are just starting out, choose one or two tax-advantaged funds, like the Vanguard Total Stock Market ETF or the Vanguard Small Cap Index ETF, or similar index funds," Dearing suggests. "These passively managed funds do a minimum amount of buying and selling — what the industry calls 'churning' — which translates into significantly less taxable investment income for you to deal with each year. They also tend to outperform most actively managed mutual funds over time."

Revisiting the goal aspect of this equation, it helps to have a contribution target in place so you have a solid idea of what you're trying to achieve. Likewise, make sure that it's a goal that you can achieve. $10,000 may take a while to reach, but you can do it. If that goal is too steep for you right now, start smaller. There's no harm in that. The most important part of this is that you set the bar just high enough to accomplish it and be motivated by your success to continuing striving further.

Do you have additional suggestions on money moves to make before investing? I'd love to hear your thoughts in the comments below.

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