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Investing is a lifelong marathon. Here are three things you should do before you start.
Investing is a lifelong marathon. When you decide to run, you can not just start running like Forrest Gump – you have to train. To start, set a goal: Are you training for a half or full marathon? Do you want to complete a long-distance run? (Well then, “Run, Forrest! Run!”).
Next, assess your current fitness level. Can you jog a few miles without getting a twinge in your side, or will you be wheezing heavily by the end of the block? Just as you need to schedule and adjust your diet as a marathon runner, there are some important steps you need to take before you start investing.
Here’s a starting point:
1. Set your goals.
2. Pay off your debts.
3. Create an emergency fund.
Just think of this as your pre-training pep talk!
1. Set your goals
If the hardest part of running is putting on the shoes (i.e., starting), then the easiest part is probably enjoying the runner’s post-race elation. Let’s think about this for a moment: what’re your goals as an investor? What’re you going to do with all that money?
Are you going to build a snowman or buy a house? Become a crab cutter captain or a table tennis pro? What do you want to achieve in the short, medium and long term?
This exercise doesn’t have to be all in your head. Just pick up a piece of paper or your journal and see what comes to mind. We’ve created a sample list here:
My Money, My Goals
If you want to take it a step further, you can try to estimate how much each goal might cost. How much would you need to save to buy new kitchen appliances? And how much would you need for a down payment on a first home? You might want to put a tentative date for each goal – it makes everything seem more realistic somehow.
As you make your list, you may find that not every goal is achievable. You may have to make some compromises (#priorities). If you can’t afford designer jeans or a new couch, that’s normal. Everyone has to make difficult choices. A ranked list can help you decide what’s important to you and what you can do without.
This process can help you take a step back and remember why you’re investing in the first place. You’re working to build your future life.
2. Pay off high-interest debt
There are two things that many people hate: running and paying bills. Although it’s tempting to combine the two (i.e., run away from bills), it’s helpful to tackle debt as soon as possible.
Why is high-interest debt so damaging? Well, the cost of using credit or debt (known as interest) can spiral out of control and leave you in a worse financial position than when you started.
Here’s an example:
Let’s say you want to upgrade to an iPhone SE – the latest model with 128 GB of storage costs about $450. If you pay cash or use a credit card (which you pay off in full), that $450 represents the total cost to you, not including taxes, shipping, and possibly an ongoing data plan.
But let’s say you don’t pay your credit card bill in full when it’s due. Maybe you only pay the minimum amount or a little more. In that case, the $450 cost could balloon. If you pay $50 a month and your credit card company charges 22% interest per year, it’ll take 10 months to pay off your debt. By then, you’ll have paid $450 (the price of the new phone) plus $46 in interest. Basically, you’d be paying about 10% more than the sticker price.
The larger the debt, the worst it gets.
Let’s say you put a $5,000 vacation on your credit card. Cha-ching! Again, your credit card company charges 22% interest, and this time you make monthly payments of $200. Now here’s the crazy part: that one-week vacation to Cancún? At that interest rate, it’ll take you 34 months to pay it back. By then, you’ll have paid an additional $1,749 in interest. (Yikes!) You could’ve taken a different vacation with that money.
So why would you try to pay off high-interest debt before investing? Well, because it’s very rare (read: virtually impossible) to find an investment that grows faster than your debt. It’s like Usain Bolt racing against a bullet train. Sure, he’s fast, but not that fast.
When it comes to running a marathon, high-interest debt is like better nutrition. It’s fundamental to your overall fitness, but it can be difficult to change. Many people feel overwhelmed by it.
Still, paying off high-interest debt may be the most important thing you can do now to prepare for your investments.
3. Create an emergency fund
You know those energy bars that runners take during a marathon? Those are their energy reserves. It’s not like they can eat a chicken salad in the middle of the race.
Even with your investments, you should have some energy boosts or cash infusions on hand. We are talking about an emergency fund here. This is the money you have on hand if your car breaks down, your new furnace catches fire, or you suffer a serious loss. (Think job loss, going to ER, or emergencies where the dog eats your computer.)
What is an emergency fund? For most people, it is an account where they keep a tidy sum of money, perhaps enough to cover 3 to 6 months of rent and living expenses. (Depending on your living situation and finances, you can start with a small amount and add to it over time – or, if you are particularly risk averse, aim for an even larger emergency fund. You can also check to make sure you have adequate insurance coverage. For health, life and disability insurance, you’ll probably want plans that are tailored to your situation (e.g., whether you have health problems, how many dependents you have, etc.).
Just as a runner carries his cell phone and $20 in cash, an emergency fund and insurance policies are there to bail you out. They act as backup plans. However, you go about it, it’s good to have a cushion. So, save some energy bars for yourself.
The marathon begins
While anyone can start a marathon from the same place, the same isn’t true for investments. Some of us have bigger hills to climb. Nonetheless, we can all take a similar approach to our training: We get shoes that fit, improve our nutrition, stock up on energy gels, and go on training runs.
Although finish times vary among runners (and some even drop out), it’s the preparation before race day that can help you get off to a good start.