If you are familiar with the ins and outs of personal finance, you probably know the importance of investing. In a nutshell, investing allows you to put your money to work so it can grow itself over time. Since investing is a long term game it is easy to want to jump in as soon as possible without calculating a plan of action, but this is not advised. Investing is one of many steps towards financial stability, not a get rich quick scheme, so work and preparation is necessary. Here are three important steps to take before investing to make sure you are positioning yourself for the best financial future you can create.
Assess Your Current Expenses
If you are just going through the motions of life and are not keenly aware of how much you spend to maintain your lifestyle, you will never truly have a grasp on your overall financial picture. A good way to track your expenses is to go about your life normally for a month and write down every financial transaction you make. This includes your bills, entertainment, clothing, and anywhere else you find yourself spending. Afterwards, sit down and evaluate what you spent. Maybe you didn’t realize you spend $80 a month on coffee or that you buy unnecessary groceries when all you eat is takeout. Assessing your lifestyle can help you make adjustments to ensure that your cash in is always more than your cash out.
Pay Off High Interest Debt
In the world of investing, it is important to know the way numbers work. It is traditionally known that in the United States, the average investor can expect about a 7%-8% return over the life of their investment after inflation. This is a good rate of return, but not when you are still paying off debt with a 10% or 12% interest rate. The price of your debt will offset your investments and keep your net worth negative even with investments growing in the background. If you have high interest debt and debt that does not grow your net worth (think car loans or credit cards), you would do better paying those off before investing so that you are cash flow positive as soon as possible.
One way to instantly undo the progress of your investments is to be unprepared when a financial emergency strikes. The last thing you want to do is cash in on your investments prematurely to cover an emergency or to go into high interest debt. Aim to start with three to six months of expenses saved before you start investing. This is normally enough to cover or offset most emergencies. Once you have this amount saved, continue saving. The more liquid funds you have on hand, the safer your investments are. Automate your monthly savings so you never see the money and are not tempted to spend it.
Davenport Laroche’s headquarters are strategically located in Hong Kong which allows investors to benefit from the busiest trading market in the world, China.