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Investing can be intimidating. But if you’re looking to build your wealth, buy a house or set up a retirement fund, investing is not only one of the best money moves that you can make –– it’s a must. For most people, understanding the basics and choosing the right investment strategy is enough to get started. But the most important question to ask when it comes to planning your financial future is whether investing is right for you, given your current financial situation.
So, to have a candid conversation about making strides toward the financial future you want for yourself, we tapped Lauren Anastasio, CFP® (Certified Financial Planner) at SoFi, during our recent Money Moves Digital Summit to share some tips on building wealth through investing, including what you need to know before you start, and how to really know if investing is right for you.
She identified five financial goals to accomplish in chronological order, before you begin investing in order to build the best possible financial foundation. ICYMI, we’re sharing them below, along with Lauren’s tips to yield your best benefit.
Establish a Safety Net
The first thing you want to do before you consider investing, is establish a safety net. Think about this as a cash savings equivalent to approximately one month's worth of your essential expenses. If you don't have at least enough cash to cover all of your living expenses for one month, then saving is your very first priority––that's the thing you should be doing, before anything else.
Seek Employer Match
Step number two is to obtain any employer match you might be eligible for. If you're not strictly self employed or you do have access to an employer sponsored plan, you will want to make sure that you're maximizing any match that you might be eligible for––you never want to leave free money on the table!
Protect Your Income
Third, protect your income. This means pursuing an appropriate amount of disability or life insurance, depending on your circumstances.
Attack Bad Debt
Next, you want to eliminate any bad debt, It’s important to make the distinction between between good debt and bad debt. Bad debt includes things like credit cards or personal loans, essentially anything charging 7% interest or higher. You will want to eliminate these in their entirety before moving on to investing. The reason is, there's an opportunity cost if you're investing and you can expect realistic average annualized returns of seven or 8% –but if your credit card is charging you 20% that's compounding daily, your money is going to be far more valuable going towards paying off that high interest rate debt than it will be going into the market. This is one step you absolutely do not want to skip.
Build an Emergency Fund
Step five includes establishing a fully funded emergency fund. This is when you take that safety net and build it up to a balance that's closer to between three to six months worth of your essential expenses. This is vitally important, because if you do have an emergency that comes up, including some type of loss of income, you don't want to have to take money out of the market and possibly trigger a taxable event or have to dip into that money when the market is down. You will want to make sure you always have cash on hand.
Once you’ve accomplished steps one through five, you’re likely ready to start investing! To learn more about investing and how to align your approach to your goals, visit SoFi.com/Invest.
ABOUT SOFI:
SoFi is a different kind of finance company whose goal is to help people get their money right. Whether you're looking to save, spend, earn, borrow or invest, SoFi is a one-stop shop for your finances, designed to work better together. Our products are built around our members—so that they have the tools they need to take control of their financial futures. Learn more by visiting SoFi.com.
DISCLAIMERS:
Advisory services are offered through SoFi Wealth, LLC an SEC-Registered Investment Adviser.
Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.