We have all heard about the importance of investing money in the stock market in order to reach long-term financial goals. While the idea of investing money is appealing due to its higher returns, saving money should be your first priority. Getting the following five things in order will give you a solid base before you begin investing.
1. Pay Yourself First
Paying yourself first is one of the best habits that you can adopt. An easy way to do this is through direct deposit of your paycheck. You can designate a certain amount of your pay to go directly into savings and have the remainder go to your checking account. We recommend that you put at least 10% of each paycheck into your savings, but if that’s not in your budget right now, start where you can and gradually build it over time. This money can be used for irregular, but anticipated, expenses like property taxes, vacations and holiday spending.
2. Fully Fund Your Emergency Fund
An emergency fund is different from your regular savings account in that it is truly there for emergencies only. What about that great Black Friday deal on a home entertainment system that would complete your man cave? Not an emergency. Or that last minute girls' weekend to an exclusive new spa? Nope, sorry. How about having money to pay your bills while you’re unexpectedly furloughed? Now you’re talking. Unexpected events don’t have to upend your life if you have fully funded your emergency savings with an amount equivalent to 3 to 6 months’ worth of expenses.
3. Get Adequate Insurance Coverage
Another step to master before investing money is purchasing adequate insurance coverage. This includes insurance for property such as your home and vehicles, as well as for your family, including health, dental and life insurance. With all of the different policies out there, there’s something available for everyone. Having adequate insurance coverage can mean the difference between going deep into debt or having to choose which bills will get paid and being able to handle the unexpected and sleep at night.
4. Use Credit Responsibly
Having some debt isn’t necessarily a bad thing if you are handling it responsibly. Showing creditors that you make on-time payments on all accounts raises your credit score. But if you have debt, it’s important that you work towards paying it down. Allocating extra money in your budget towards debt reduction could potentially save you thousands of dollars in interest fees.
5. Set Short and Long Term Goals
Determining both your short and long term goals will help you create a plan for how much money you will need to reach them. Making your goals SMART (Specific, Measurable, Attainable, Relevant, and Timely) helps you check in on your progress and stay the course. If you write down your goals and put them somewhere that you will see them every day, you are over 40% more likely to achieve them. Above all else, remember that these goals will help get you to the point where you can start investing money, so stay committed to doing what it takes to reach them.
Knowledge is power. Be informed and thrive. Royal Credit Union is always here to help!