3 Things to do BEFORE You Start Investing
So you’re interested in investing? YAY! We’re thrilled for you to embark on this journey to financial freedom! But before you dive in headfirst, there are a few crucial questions you need to ask yourself to ensure you're truly ready.
NUMBER 1: Do you have an emergency fund?
If you don’t have an emergency fund, this should be your NUMBER 1 PRIORITY! Seriously, it’s more critical than paying off any debt.
Why? Because life throws curveballs, and having some money tucked away can be a lifesaver when things go south. Whether it's a sudden car breakdown, unexpected job loss, or a canceled flight leaving you stranded in Mexico, your emergency fund is your safety net.
So, what's an emergency fund? It's essentially a stash of cash (figuratively speaking, because you'd of course keep it in a bank account) reserved exclusively for genuine emergencies. Need to fix your car to get to work? Use your emergency fund. Can't cover rent due to job loss? Emergency fund to the rescue.
But let's be clear: finding that perfect pair of stilettos to match your bridesmaid dress? Sorry, not an emergency.
So, how much do you need in an emergency fund?
At least 2 months' worth of basic expenses – just enough to cover bills and groceries. However, financial advisors often recommend saving anywhere from 3 to 6 months' worth of expenses for added security. Families or homeowners may opt for an emergency fund covering 6 to 9 months for extra peace of mind. Freelancers or individuals with inconsistent income month to month will also often opt for a larger emergency fund of 4+ month to make sure they never end up in a lull of finding work and can’t pay their rent or mortgage.
But what if you're drowning in high-interest debt?
If you're wrestling with substantial high-interest debt (like credit card debt at a whopping 20%), consider creating a “baby” emergency fund of $1,000. Once you've tucked this away, prioritize paying off your debt pronto before beefing up your emergency fund further.
Where should you keep your Emergency Fund?
A High-Interest Savings Account (HISA) of course! This type of account will make sure your money grows for free while it’s sitting there thanks to the high interest rate that these accounts earn. Most major banks offer high-interest savings accounts, but we recommend shopping around to find the best rate possible while avoiding fees. Major banks tend to have a minimum amount that you have to keep in the account or they’ll charge you fees, and they often only offer 0.5-2% interest. Alternative banks tend to have better deals- just make sure whoever you go with is insured and reputable! Nerdwallet also regularly updates their list of the best high-interest savings accounts for Canadians and Americans, so that’s a great resource to reference (their recommendations will always be insured and reputable).
NUMBER 2: Are you saddled with high-interest debt?
While debt is rarely a cause for celebration, not all debts are created equal. Credit card debt, with its sky-high interest rates (often exceeding 15%), is particularly harsh.
On the flip side, mortgage debt typically offers low interest rates (usually under 6%) and can increase your net worth. Student loan debt falls somewhere in between.
If you're grappling with credit card debt, prioritize paying it off before delving into investments. However, if your loan interest is relatively low, you may opt to invest while chipping away at your debt at a steadier pace. This strategy works wonders if your investment yields a higher rate of return than your debt interest.
Low-risk investing tends to earn on average 7-9% interest per year. So, make sure you’ve paid off any debt that has a higher interest rate than 7% before you shift your focus to beginning to invest some money each month. Some people prefer to pay off high-interest debt, then slowly chip away at moderate and low-interest debt while investing some money each month, while others prefer to focus on paying off all moderate-interest debt before they start investing. The choice is yours! Mortgage interest is typically considered low interest (<6%) so most people take their time paying it off while investing to help grow their retirement fund.
NUMBER 3: What are your monthly living expenses?
Time for a reality check: Are you living within your means? It's time to scrutinize your spending habits and ensure they align with your income.
Financial advisors often recommend keeping your rent or mortgage below 30% of your monthly income (pre-tax). So, if you're raking in a $55k salary per year, that translates to $4,500 per month before taxes ($55,000 / 12 months = $4,500). Now multiply that number by 0.3 to figure out what 30% of your income is. In this example, your housing costs shouldn't exceed $1,400 per month ($4,500 x 0.3 = $1,400).
Of course, where you live may skew these figures. In high-cost cities like Toronto, New York, or London, finding affordable accommodation within that 30% threshold might be a pipe dream. In such cases, trimming expenses elsewhere (think entertainment or groceries) becomes key to freeing up some money to start investing.
Once you've honed in on your monthly expenses, you'll have a clearer picture of how much extra cash you can channel into investments. Whether it's $25 or $1,000, every dollar invested has the potential to grow your wealth, offering much higher returns compared to it just sitting idle in a regular savings account.
If you’re interested, we have a free Simple Budget Tracker that makes it super easy to track and calculate your living expenses. Download it here.
And if you’re enjoying this content, check out our free course called Money 101: What They Didn’t Teach Us in School!
KEY TAKEAWAYS:
Prioritize building an emergency fund to weather life's storms before venturing into investments.
Pay off high-interest debt, particularly credit card debt, to prevent it from devouring your investment returns.
Scrutinize your living expenses to ensure they're in line with your income, freeing up funds for investing, no matter how modest.
About The Authors
Amanda and Siobhan found a shared passion for personal finance shortly after completing their MBAs in 2018. Amanda excelled as a Director of Product in the tech industry, while Siobhan established herself as a leader in e-commerce before transitioning to academia as a Professor.
In 2020, they joined forces to found Hiver Academy, a platform born from their own experiences and triumphs in conquering student loans and building wealth. Realizing that financial success is within reach once the complexities are simplified, their mission now revolves around empowering individuals to achieve financial freedom.
With a wealth of knowledge and a commitment to demystifying money and investing, Amanda and Siobhan are dedicated to helping others navigate the path to success.
