How to Start Investing

Korey Knepper |

Financial freedom is something that most people struggle to find. Even when you do find it, it is a struggle to get there. It is not very often that someone makes all the right financial decisions in their life. One of the correct decisions is investing if it is done correctly. There are a million ways to invest your money, stocks, bonds, real estate, crypto, and many others. But it’s not just about what you invest in, but how you invest that can make all the difference. A couple of incorrect decisions can send you down a bad path. Knowing how investments and tax qualifications operate is imperative to staying on the right path. Let’s first look at what you should have before you start investing.

When it comes to budgeting, and day-to-day money management, I like to look at Dave Ramsey’s baby step millionaire series. Before I as a financial advisor feel comfortable with you putting $500 a month into an investment account to earn 10%, we should make sure that you aren’t paying 25% to credit cards. Being debt free outside of your mortgage is the Ramsey rule, and as with any rule there are exceptions, but for most people, this is a great starting point. If you want to start investing, start by paying down debt. Establish a number of how much you pay a month, and then put that towards debt. I highly recommend reading Baby Steps Millionaires for more information on paying down debt. Once the debt is gone, use that money to start your emergency fund.

This is where the investing journey begins. When you are used to putting away a certain amount of money, and the debt is gone, it is time to start building up your emergency savings. You can do this in a traditional savings account, or a brokerage account. By investing in the brokerage account, you lose some of the liquidity and safety of a savings account but can see some higher returns. If you choose to invest in a brokerage account instead of a savings account for your emergency fund, having an advisor that is used to how to handle that is helpful. This money is what we consider “mid-term money”. Your checking account is for short-term money, day-to-day expenses, whereas this savings account or brokerage account is for emergencies. This means we can invest but should be investing with a more conservative risk tolerance. We can also use this brokerage account to go past just emergency savings. We can use it to save up for large purchases, like a vehicle, or use it to produce income to fund other accounts.

The next spot we would move to when investing is our long-term assets. These are your retirement accounts, IRAs, 401Ks, among others. Different retirement accounts have different rules and tax qualifications. Knowing these, or having a resource that understands these, is key to making the correct decisions in the long term.

One thing you will notice about where to start investing is that there is no life insurance discussed. This is because LIFE INSURANCE IS NOT AN INVESTMENT! A whole life policy might be sold to you as an investment; however, it is not. Sure, a cash value accumulates, however, the rate of return on a whole life policy is so low, that it resembles a savings account, more than an investment account. Life insurance is important to any financial plan; however, we do not view it as an investment.

I am going to end this with the difference between following the wrong path and the right one. A couple with three kids, and one main source of income have decided to invest. They decided to put the money in their 401K with company match. This is a good decision, and a step in the right direction. However, they have not set up a proper emergency fund. A recession happens, and that one major source of income is gone. Kids still have activities that cost money, and food still needs to be put on the table, however, there is no emergency fund to tap into. This couple decides to tap into their 401K. The money hits their checking account, and they can survive for five months until new employment. What they didn’t see coming, was the tax bill. Taking that money out came with a ten percent penalty. The next course of action was to refinance the house to pay off the tax bill. This is how making one incorrect decision can snowball into a major problem. Knowing how and where to start investing is key, if they had established the emergency fund, they would not have had the tax issue, and wouldn’t have had to refinance, adding more debt to the bottom line. If you are interested in investing, and would like to learn more, schedule a call here. As always, thanks for reading.