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{Listen to the audio of this section and be sure to review your action items at the bottom of this page}

You’ve heard it said over and over again - if you want to build real wealth, you need to invest your money  - but it’s also important to prepare yourself financially BEFORE you invest. 


Because investing comes with some risk (which we’ll be getting into lesson 8) and having the right financial foundation will help you make sure you are well prepared to invest.

Key factors to ensure you are prepared to invest

There are 9 key factors to ensuring you are prepared to invest - let’s get into them: 

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1. You have an income (preferably a steady income)

It goes without saying that you need money to invest, even if it’s just a little bit. When you are starting small, the key to building your portfolio is investing consistently over time and having a steady income will allow you to make these consistent investments over time. If you are between jobs or trying to find a job and don’t have an income coming in, your focus should first be on getting enough money to cover your basic living expenses before you think about investing.

2. You are able to meet your financial obligations

While your money is busy working and growing for you in the stock market over the long term, life goes on in the meantime and that means you still have budgets to create and bills to pay. So before you invest you need to be able to comfortably meet your financial obligations including covering your day to day needs and overall living expenses.

3. You have a solid emergency fund

Your emergency fund is to ensure that you are able to weather a storm or unplanned life circumstance (for instance you lose your job and income, you need to repair your car or need to have major repairs done in your home). It is essentially a backup plan so you don’t have to leverage debt or derail your financial goals when these types of situations come up and funding it should take priority over investing. Ideally you want to have 3 to 6 months of your basic living expenses put aside before you start putting money aside for investing.(Learn more about emergency funds here)

4. You have paid your high interest debt

Once you have your emergency savings in place, it's time to create a budget and get aggressive with your debt, starting with any high interest debt you might have.

Why the aggressive focus on your debt?

Well, the cost of debt in terms of interest you have to pay is probably not worth it (especially on your high interest debt) when you compare it to the average savings account interest rate (less than 2%) and the average rate of return of the stock market over the long term (~8%). For example, if you are only earning 1% in your savings account but are paying 15% in interest on your debt, you are actually indirectly losing money by keeping your money in your savings account. It's better to pay off your debt asap and then once that debt is gone, ramp up on your savings and investment goals.

5. You have a plan in place for your short term life changes (e.g. getting married, having a baby, going through a divorce)

If you know you have a life change coming up soon that will require financial support for instance, you are planning a wedding or preparing for a baby etc, it’s important that you plan for it accordingly by making sure you have money put aside to support the changes. This isn’t money that you should be investing since it’s money you know you’ll need in the short term.


6. You’ve done your research and have an understanding of what you’ll be investing in

We’ll be delving into how to research stocks in lesson 9 but it’s important to set the stage now before you invest a dime of your hard earned money. You need spend some time researching your potential investment with a minimum goal of understanding what it is, what it will cost and how it has performed in the past.


7. You understand how much risk you can tolerate

As and investor, understanding your risk tolerance will make all the difference in how well you sleep at night. Understanding how much risk you can stomach, will in turn help you determine how aggressive or conservative of an investor you’ll be. Understanding your risk tolerance will also help you eliminate panic when the market is swinging and help you make better buying and selling decisions. More on risk in lesson 8.


8. You have realistic expectations on how your investments will perform

The average return of the US stock market since inception in 1817 has been about ~8%. There have however been years when the average rate of return has been much higher and the stock market has had double digit gains and there have also been years where the stock market has had really major declines. But despite the peaks and valleys, over the long term that 8% has stayed consistent so it’s a pretty good bench mark to use and when it comes to setting your expectations, in my opinion, conservative is best.

9. You have a plan to diversify your investments

When it comes to investing in the stock market it’s important that you don’t go all in with one stock type or industry otherwise you might find yourself taking on a ton of risk when that stock or market segment goes through a rough patch. Having a plan to diversify your portfolio also means that you have a plan to mitigate your risk. It’s all about having a good mix of investments. More on risk in lesson 8.

The exception

If you are not able to check off everything on the list above right now, I will state one exception to getting started and it’s this:

If you are employed at a company that currently offers you a match for contributing to your retirement investment accounts you should take advantage of this asap and contribute just enough to get the full match. 

Why? Because it’s free money and nothing beats that kind of investment. Usually contributing enough to get the free money comes out to a small percentage that you won’t really miss in your paycheck anyway.

Do that and then you can get back to preparing yourself to invest using the guidelines above!

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Try it out in your workbook (located in the investing main menu) using the following pages: 

  • How prepared are you?

Start work on this checklist to ensure you are well prepared to invest. Be sure to come back to it as you make progress in the course.