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Hello new investors! Before I started investing my money I wondered what are the things I actually need to do before starting investing my money. There are so many recommendations out there that can be quite confusing. In this post I will show you the only 3 steps you need to take for becoming successful and very confident with investing your own money.
Depending on where you start, it’s important to get the big picture of your personal finances before we dive in – if you haven’t already. So, the very first step you need to take before doing anything else is getting clarity on your personal financial situation. What is your status quo? That is the preliminary step.
Contents
ToggleGetting a clear picture of where you’re at when it comes to your personal finances is the foundation of any financial planning. You could skip this. But so many that have done this exercise discovered some financial surprises. If you cannot answer these questions, start doing your investigations – that would be an enormous milestone on your journey:
The result shows your so called net worth. A net worth is THE measure of financial success. It basically shows the fiscal value of your household. Your net worth is the most important financial number that you can track for your financial life and for planning the growth of your wealth.
I can highly recommend to figure out what your personal net worth is ASAP. For Marc and me that was a life-changing process. But we had our difficulties with calculating our personal net worth, especially when it came to our household goods. It was quite some trial and error when we tried to estimate our own numbers. That’s why we want to make it easier for you. Also, we wanted to measure how our wealth would grow over time and somehow track it. If that is you, we may help you.
Take advantage of our Net Worth Calculator to drastically simplify the process of calculating your personal wealth status. It offers 4 Sheets – net worth, asset balance, debt balance, household goods. Those 4 Sheets make it so easy to calculate your net worth fast. Also, you can set financial goals and keep track of them over the next 10 years.
No matter what your net worth is, you know it now! That’s the most important thing. You know where you‘re at financially speaking. There is no shame and no blame if you’re in the red. Here are the 3 things you need to do to get out and stay out. These are as important as if you’re in the green with your net worth. And these are the same 3 things and financial goals for everyone who starts investing money:
The most common money struggle people have is debt. Especially nowadays and especially high-interest debt like any debt with at least -8 % negative interest rates. In earlier times that almost didn’t exist. People just didn’t go out buying things they could only afford using high-interest debt. That seamed insane. Until the creation of consumers. Don’t get me wrong, people always consumed. But they did not consume so much that it literally eats up their dreams.
I too had the experience of feeling almost trapped within my personal finances. In my 20s I used to pay with debit card or credit cards. I went into debt for everyday expenses. Especially for things I wanted to afford but couldn’t. I knew at the end of the month I get my salary and I will be ok. I never really thought about paying -15 % interest rates or about lowering my credit score. But once such a bad money habit sneaks in, it leads to a series of poor financial decisions and poor investment decisions overall. It took a while until I got that. Here is what I learned.
If I find myself in a bad financial situation I need to take action to get out. ASAP. I don’t wait until my circumstances might change for the better. For example, if I wait for one single expense to disappear it’s like a drop in the bucket. Or until I earn more. „If I’d only had more money I’d had no more worries.“ is such a common phrase. You hear it all the time. My financial experience was the opposite. The more I earned the more I spent. It was never the more wealth I’ve created – as it is today.
However, if you find yourself having that high-interest debt but you want to start investing your money think of it this way. The stock market had historical annual returns of around 9-10% on average over long periods of time. It’s likely that you too can achieve these returns even if past performance do no guarantee future results. However, if you have to pay -15% on high-interest debt to your creditors you are still loosing money: -15% + 10% = -5%. That’s why you need to first pay off your high-interest debt. Then, you can truly kick-off your wealth building journey.
When we moved into our house the first thing that happened was a part of our heating oil tank braked. No problem. We had some money on the side. So, we paid for it. ASAP. But afterwards there was not much money left over. If something would have happened to our car now, we would have been broke. Crossing fingers. It didn’t happen. But it was that experience that painfully showed: if we have only little money saved up, it can easily happen that we need to go into debt to pay for any emergency like a health issue we or our loved ones face. If people or even pets depend on you that fund is even more important.
But it’s that habit of saving that money first we need to develop to climb the ladder of financial success and create a safe financial future for ourselves and our kids. We committed to a fully-funded emergency fund so that we can survive financially if we won’t get any money from anywhere. What that money also does is protecting you from taking out money from your investment portfolio if unexpected things happen where we immediately need money for. And even more important, it protects you from taking on that high-interest rate debt to pay for that emergency. So, an emergency fund acts like a financial safety. It‘s your financial lifeguard.
General recommendation
The general recommendation for an emergency fund is as follows. Save up at least 3 months of living expenses. Ideally you put your money into a high-yield savings accounts where you earn 2-4+ % interests rates. That’s where we are right now. Once you’re there you can start investing your money WHILE you continue building up that emergency fund up to 6 month of living expenses.
If you’re living paycheck to paycheck that seams impossible. Typically financial advisors then recommend to focus on a so-called starter emergency fund of 1.000 Euro. Then, work your way up.
But you need to know about your living expenses first. I don’t mean roughly the amounts. I mean the exact amounts. For every budgeting category. Questioning those is another topic in itself. First, you need to know how much money you need and want to live off of. Only then you can make an accurate calculation of the total number of your emergency fund. I believe the easiest and best way to figure it out – if you haven’t already – is creating a household budget.
My husband Marc and I are successfully budgeting our money for > 10 years now. Therefore, Marc loves using YNAB, short for You Need A Budget. As he is an IT guy he is quite nerdy when it comes to such IT tools. I have to admit that it is so easy to use and comprehensive – even for me – that I agreed to use it too. He will feature the exact process we use for budgeting (with YNAB) in another article.
I believe budgeting is simply the key for investing. Having a budget not only allows you to understand exactly where your money is going to. But it will reveal the financial room you have for investing based on your current lifestyle situation. You then can confidently determine an amount of money to invest you feel good about.
For example, we personally have 300-2.000 Euro extra money each month. That varies so much because it depends solely on my income. If I am on parental leave – with only little money as parental allowance – that results in not much money left over in the bank so to say. If I start working again part-time after parental leave we have more money left over.
However, when we only had 300 extra money I felt very uncomfortable with investing all of it. That was the only wiggle room we had in our family’s budget. And that’s the point. YOU need a budget to see the extra money you have and then decide how much money you want to invest from that amount.
Managing your budget comes down to balancing your priorities. You decide which areas in your budget are most important to you and where your money should go. This is also a great exercise to train your financial independence muscle. If you want to know exactly how to achieve your family’s dream of early retirement or semi-retirement definitely read the post about A Unique Guide How To Retire Early With Kids The Fastest Way.
If you’re budgeting you put yourself into the drivers seat of your personal finances. You know your fixed expenses AND your variable ones. Your fixed expenses are everything you absolutely NEED to spend money on like housing so that you have a roof over your head. Even if not everyone needs to pay for that. We will show you in a blog post to come how to live completely rent and mortgage free as a European family. However, your variable expenses are those you WANT to spend money on but don’t need to. Some of our wants are nice-to have like eating out (including f.e. canteens). But other variable expenses are a must like groceries. Why is it so important to make that split?
If you ever have to live on a budget like on less money you know immediately the expenses you can cut out. I personally created numerous budgets when I tried to cut costs during my parental leave with only little money as parental allowance. It was a long and torturing process of trial and error. Until I found a super simple method. I share this method with you in our Bare Bones Budget Calculator. I love this calculator and use it on a regular base as I initially created it just for myself. That’s because I always try to find ways to lower our expenses while living a healthier and richer life as a family all-together.
But this Bare Bones Budget Calculator serves another purpose. It helps you making it through a period of time with less income or higher expenses or both while continue investing. This is very important. And we know that because I failed at it to be honest. But I learned from that experience and that’s how this calculator was born. It helps to not put investing at the end of your budget. It helps you to figure out a way how to make financial room for investing – whatever your budget is. I published an article on exactly how to create your first bare bones budget.
I believe investing is not a luxury reserved for the rich with a huge budget so to say. Investing is a must for everyone, but especially for people who are not rich. For every budget, especially when you only have small amounts to invest – no matter your personal circumstances. I showed you in this blog post The 7 Best Ways For Parents To Invest Little Money. Because any money you invest is enough money when you start. It doesn’t matter how much money you have to invest. That’s not the most important thing. But it is very important that you start cultivating that new financial habit of investing your money – consistently and constantly over time. That you learn how to invest. That’s what this article focuses on that I just mentioned.
Now, there are so many recommendations on your ideal savings rate and investment rate for your retirement accounts. In the FIRE community we talk about saving and investing at least 50 % of your total income. But please, don’t stress yourself out too much when you just start. The point is, it doesn’t matter how much money you start investing. The only thing that matters is that you start investing consistently and continuously. Commit to raise your personal investment amount over time and take the necessary steps to achieve your financial goals.
Simply start investing with what you have and keep on adding to that over time. Whenever you have „more money“ left over than expected consider investing at least a part of it, if not half of that or even all into your brokerage account. If you follow this simple investment strategy you take care of you having a comfortable financial future. That investment strategy is called Dollar-Cost Average. We reveal its huge potential in depth in the article as mentioned: The 7 Best Ways For Parents To Invest Little Money.
Traditional asset allocation advice says to diversify an investment portfolio between different asset classes. Having a diversified portfolio should protect your wealth. In other words: if you consider to build up a stock market portfolio also think about at least one more asset class like real estate to invest your money into. Do not put everything in one basket or on one card.
Here’s a quick overview for the term asset (classes) for new investors. The term asset describes just perfectly the core idea behind investing: You put your money into something where it grows over time. You are not consuming this money or letting it sit in your bank account becoming less in value because of inflation. This something is called asset. So, the term asset describes something you own and if you would sell it, you would get money for it.
There are different asset classes like real estate properties, stock exchange products, material goods like art pieces or rare alcohol, precious metals like gold or annuities like life insurances but also owning a business can be an asset. The list is basically endless.
If looking at one asset class itself you should diversify here as well. For example, if you invest into real estate properties do not invest all of your money into only one property or one place or location if possible. The same is true for the stock market. If you build up your own investment portfolio do not invest all of your money into one stock. Also, diversify geographically and in between the different investment options you have like Index Funds and individual stocks which I personally like to do. In this blog post I talked about The 7 Best SAFE Index Funds For Financial Independence and presented the different investment options you have in the stock market.
If you put your money into an investment product you don’t understand you’re speculating, you’re not investing. But if you want to truly invest your money, make sure to know the basics of the financial products you want to invest into.
When I started to invest into Index Funds – it was the MSCI World – I had to ask myself some basic questions. What’s the full naming behind? For the MSCI World that would be Morgan Stanley Capital International World Index. Who was it’s inventor? The US investment bank Morgan Stanley. What’s the history of its returns? 9% on average since the inception in 1975. These are just a few questions to ask yourself before making any investment decision. I was surprised how many people couldn’t answer those basic questions for their own investments.
The easiest and fastest way to decide where to invest your money into is getting clarity of the financial goals you want to achieve by doing so. That will automatically clear your risk tolerance. I like to split your investment goals into 2 categories.
Category 1 is investing for a short term goal like a down payment on a house in 5-10 years from now on. In this case you need the money in 5-10 years. You want to make sure to then have that money readily available. Now, you need to clear your risk tolerance. Government bonds and bills for example have lower risks but also lower returns. As they are also tied to a specific time frame these could match your personal timeline. Index Funds or mutual funds (which we don’t hold due to higher fees explaining this in this particular article) or stocks offer higher returns. But at the same time you don’t know what the stock market will be doing in 5-10 years from now on. Because of the unpredictable market downs every financial advisor would tell you the same investment advice: the money you invest shouldn’t be needed for the next 5-10 years. That brings us to the next financial goals.
Category 2 is investing for a long term goal like retirement. You then can invest with a tax-advantaged vehicle. That is an individual retirement account supported by the state or an employer-sponsored retirement plan or both. But investing here means your money is tied to a rigid time frame where you can’t access that money until you turn 65 for example. Also, you may not be able to choose between mutual funds or Index Funds or ETFs – short for Exchange-Traded Funds – to invest into. However, if you want to retire EARLY or to semi-retire before traditional retirement age you need self-funding your family’s retirement accounts. Now, you can choose between investing into mutual funds or Index Funds or ETFs. More on that in the next paragraph.
Let’s talk a bit about your risk tolerance. I found that there are many misconceptions about what a risk actually is when it comes to investing. Most think the level of risk comes down to your willingness of accepting certain risks in exchange for potential high returns. But an investment risk has several dimensions. One is volatility. That comes down to the ups and downs in the market you can endure. The other is the potential loss of money for the potential higher returns which you mainly have when investing into individual stocks.
Another dimension of risk is the likelihood and pace of the recovery of an investment. That is crucial but totally underrated. For example, an Index Fund or stock is very volatile. But at the same time it can offer much higher returns and recover faster than other investment products like bonds from a market down.
That can make Index Funds or stocks be actually safer. That’s a quite new perspective on risk. Not because it‘s new in the sense that it was just discovered. But because only a few actually talk about that risk dimension of the likelihood of (fast) recovery. And isn‘t that the goal of any investment product? When my investments loose in value due to a market down – and they will as they already did – I want them to recover and gain back in value as quickly as possible.
I believe that it is much easier and „safer“ if you’re invested into either „the right stocks“ – which I cannot predict – or so called stock ETFs or Index Funds as they spread the risk for you so to say. If you want to know about that type of Index investing or simply about the funds we personally buy, go ahead and read The 7 Best SAFE Index Funds For Financial Independence.
If you still hesitate with investing your own money into the stock market consider using a platform to learn about that without using your own money. Such a platform is the „Investopedia Stock Market Simulator“. It offers investing virtual money before you actually invest real money into a brokerage account. Such a tool is great to get a deeper understanding of how the stock market works in general. Your kids could also use it to learn on their own how to use an online brokerage account.
To end the article I like to invite you and your kids to run your own numbers in our free (!) Investment Growth Calculator. It visualizes what’s possible for your (kids) money if you start investing it into the stock market (right after their birth). That still just blows my mind. If you simply let your money sit in the market for decades it will multiply itself over and over again. What a great birth gift that is.
Here’s an example of Sara investing 25 Euro per week or 100 Euro per month at a decent 10 % return rate right after birth over the course of 50 years. We want to compare this to Alex who first started to invest at 30 years old. How much does he have to invest to catch up with Sara at the age of 50? I very much hope this fascinating result helps you and your kids to start investing now.
The result is staggering. Alex would need to invest 2.030 EUR monthly to match Sara’s portfolio when 50 years old because he started investing not before / only at the age of 30. Not only that. The scenario also shows the enormous effects of compounding over time. Sara would only have contributed 60.000 EUR to reach her goal of around 1.4 Million EUR at the age of 50 (1.200 per year for 50 years). Alex, now hold on tight, would have to contribute 487.200 EUR (24.350 per year for 20 years) since he missed 30 years of compounding previously. That is over 8 times more compared to Sara. That shows that the earlier you start the less you need to invest to reach the same financial level.
When you walk away today with at least one new idea to improve your personal financial journey towards F.I.R.E. I’d love to show you some more in the next post. If you haven’t already, you can apply to become a part of the community to not miss any new release. For that you can subscribe to our Newsletter below in the green footer.
I’d love to hear from you: What is THE thing you personally need to tackle before start investing but struggle with? Let me know in the comments below!
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