In the My Own Advisor inbox I continue to get emails from readers about starting their investing journey. I’m going to revisit a few things I strongly believe in that should help you out on that. Let me know your thoughts and whether you agree (or disagree) with these suggestions in a comment below.
Do this item #1 – net worth calculation
Figure out where you are. What I mean by this is, figure out your net worth. What are your assets? What are your liabilities? What is the difference between those two values? Knowing what you’re worth (or what your family assets are worth) can be important indicator of financial health. For most people, one of your long-term financial goals should be to increase your net worth over time – that is increase your assets, decrease your liabilities, or both at the same time.
Do this item #2 – cash flow calculation
This is another financial indicator. Are you running a surplus every month? Are you running a deficit every month? This is another basic financial principle. Yet the fact that many people can’t pay off their credit cards every month, nor can they pay down their line of credit over time, is likely an indicator they can’t manage cash flow. I suggest you stop wondering “where does all your money go” and do some analysis. I found the folks at TD Bank actually have a rather nice personal cash flow calculator to use – try it out here. Ultimately you want to be running a surplus with your money every week or every month.
Calculate your monthly expenses and subtract your expenses from your net income (that is the money you actually take home). If the result is negative, that means you spend more than you earn – which isn’t sustainable. If your result is positive, that’s a good start, but by how much? To invest your net income should ideally exceed your expenses – with money to spare – which leads me to item #3.
Do this item #3 – establish an emergency fund
Personally, don’t listen to anyone very long who says you don’t need any emergency fund of any size. These people haven’t had a major emergency in life yet, or they have plenty of assets as to not worry about any short-term cash emergencies, or they’ve been very lucky in life thus far. Accept it or not, $hit happens to the best laid plans. In my opinion, keeping some cash on hand is a hedge against the unplanned and unforeseen – covering some “what ifs” in life.
Before you start investing I suggest you do all these three things. I suggest this because…
- If you’re net worth is negative (and that negative number is large), you should focus on getting a handle on your liabilities first. You should focus on killing debt as one of your financial priorities.
- If your cash flow is negative, meaning you cannot run a monthly surplus, you realistically you have no money to invest. You should focus on becoming cash flow positive before you invest.
- If you don’t have any emergency fund, meaning you can’t cover any short-term expenses without tapping credit or going into debt, you should likely put your emergency fund in place before you invest.
These are just my suggestions based on what has worked out for my wife and I to date – your mileage may vary. As always let me know your thoughts.