Everyone knows they should begin investing… But, if you just take some cash and throw it into the market without a plan, specific goals, or any understanding of investment basics, you’re likely to lose your hard earned money – and fast!

There are a host of considerations you should examine before opening a brokerage account and clicking submit on that first transaction. Do you know what you’re investing in? Are there tax advantages you can take advantage of? How do you feel about volatility, investment fees, illiquidity, and your time horizon?

In this post we’re going to break down some of the most important aspects to consider before taking the plunge into investing.

Top 8 Things to Consider Before Investing

Let’s be honest, not everyone should be an investor—at least not yet. That’s because there are a number of other money gears people should cycle through first. Here’s our top eight things to consider BEFORE investing. 

1. Have you covered the basics?

First thing’s first. It’s important to eliminate any high-interest debts before you start investing. The lone exception is investing enough to get any match your employer offers with a workplace retirement plan (if you have access to one). Other than that, we don’t want you to put the cart before the horse. Pay off those unsecured debts like your credit cards or any personal loans before you dip your toes into the investing world.

Additionally, you’ll want to make sure you have a solid financial foundation before you invest. This means not living paycheck to paycheck and having enough cash in the bank to ensure you’re able to withstand any unforeseen setbacks. If you don’t have a fully funded emergency fund, you’re not quite ready to start investing just yet.

The cool thing is that once the credit card debt is paid off and you’ve reached that level of savings, you’ve got a green light to begin putting money from your paycheck into investments… almost.

2. Learn as much as you can

Knowledge is a key factor before you start your investing journey. Do you understand the fundamentals of how specific investments work? Do you know how certain accounts function and what they’re designed for? We see LOTS of folks diving into investing with a brokerage account when they’d be better off opting for a Roth IRA instead.

When it comes to a specific fund, individual stock, commodity, or other “opportunities,” be wary of making an investment just because you saw a headline on Reddit. Did a so-called financial expert on CNBC say that a certain stock was a BUY NOW? Even if they were wearing a nice suit and seemed intelligent, don’t trust that person with your hard-earned cash! That’s exactly what you want to avoid.

Never invest in anything you don’t understand. If the investment is so complex it makes your brain hurt while trying to interpret it, avoid it. Rule of thumb, if you can’t explain how it works to an 8-year-old it’s probably a bad idea.

Here are some resources to help:

• Investing basics for beginners
• Do I need a financial advisor?
• Avoiding Financial FOMO

3. Think about your goals

There are many differences between saving and investing. But the simplest way to parse them is: Investing is locking up your money for long-term goals. Savings should be for short-term money needs.

Think about your goals. What are some of your long-term goals? (think: retirement, kids college funds, etc.). And what about your short-term goals? (Eg. replace the car in two years, save for a home down payment.)

Investing involves risk, which can mean losing money on a short timeline. Given the fluctuations of the market, there will be weeks, months, or even years where the investment you’ve made isn’t looking great. But, with each downturn, there’s a big recovery if you can summon your patience and wait long enough. That’s why we want you to develop a long-term mentality when investing. Put away that money and plan on not touching it for decades.

On the flip side, if you’re thinking about needing to access that saved money in less than ~5 years, you should put that cash into safe places and conservative investments. A high-yield savings account or CD might be a good fit.

All in all, having your money assigned to specific goals based on when you’ll need to access it will make you a more successful investor. It will mentally prepare you for market ups and downs and protect the cash you need in the short term.

4. Think about risk and volatility

Despite what you are investing in, it always involves some level of risk. However, the longer your investment timeline, the more risk you can handle. You have to be real with yourself and ask, “Am I OK losing money?” Loss aversion is legit, and many folks have a hard time investing because the potential of seeing that balance decrease takes an emotional toll.

Remember that short-term losses are completely insignificant to your long-term investment plan. It’s the time IN the market that’s more important than timing your entrance. And over the long term, we can take comfort in knowing that the market goes up 99.8% of the time over any 15-year period.

Helpful tools:

• Vanguard Risk Questionnaire
• Podcast Ep #553: Ratcheting up Your Risk Tolerance

5. Write down an action plan

Before investing, develop an actionable plan and determine your “why.” Many people skip this step because it sounds like something your grandpa would do (boring!). Why write anything down when you can download an investment app, set up an account, and buy/sell stocks in under seven minutes?

Well, studies show that when you write something down you’re far more likely to remember it. The same is true when we’re talking about writing down your plan of attack when it comes to investing. Just the mere act of putting pen to paper reinforces your newfound plan. And having it on hand for future reference is extremely helpful.

Your written investment plan can be as simple as, “I plan to invest $500 into a total stock market ETF every month in order to max out my Roth IRA.” That’s not complex, but it is informative! 

Investing without a plan is like going to the airport and buying a plane ticket without even asking the destination. Fools invest by “clicking and hoping.” Don’t be one of them!

Here are a few things that can help develop your plan:

• Creating a Money Mission Statement (Worksheet)
• Personal Mission Statements with Scott Rieckens
• Setting SMART Money Goals

6. What are the fees?

You may have heard about low-cost index funds and target-date funds. If you purchase a total stock market index fund via Vanguard, Fidelity, M1, or Schwab, you’re going to pay next to nothing in fees. (In fact, Fidelity has a handful of ZERO COST index funds! Seriously, they have no expense ratio at all.)

However, there are still lots of investment firms charging in the 0.5% range for you to invest your money in the total stock market or S&P 500 index fund. That’s 10 times what you should be paying!

Low-cost brokerage firms make it cheap to invest, while many others are still charging. Be wary of the impact of fees on your investment returns. Simply paying 1% in additional fees every year could cost you 25% of your portfolio’s value over 40 years. So instead of having $1 million, you’ll actually only have $750,000. Pay close attention to those fees!

Related info:

• 12 Common Fees and How to Avoid Them
• How to invest in low cost index funds
• How to fire your financial advisor (including a script with some roll play sentences)

7. What is your timeline?

We already touched on your long-term and short-term goals…But let’s dig a bit deeper into your time horizon when it comes to investing. If you haven’t thought through that correctly, what might have been a great decision can turn out to be an awful one. For instance, if you were invested in the S&P around the dot-com bubble, the Great Recession, or the pandemic, the outlook was looking pretty grim. If you needed access to the money in a downturn, you’d be locking in losses. But if you had time to let your investments recover, that was just a blip on your investing radar.

If your time frame starts to become shorter than 15 years, you start to realize a higher risk of loss. If you desire to invest over the next 15+ years, consider simply going with the total stock market index or the S&P in order to maximize those higher gains with a 100% stock market allocation.

However, if you’re looking at investing for a goal in the next 5-10 years, like kids’ college, then considering something like a TDF could make more sense. Just keep in mind that your goals and time frame have an impact on how and what you’re actually invested in.

8. Where else could you invest this money?

There are other ways to invest that might align with your strengths and skills, which could lead to better outcomes. For example, starting a small business. It can often take a lot of money to get an operation off the ground, especially if it involves a brick-and-mortar space, and that is money that might work harder for you in your business than invested in the stock market.

Purchasing a house for your primary residence is another example. Sure, you could see a better ROI investing that money into the stock market. But, there are some things that are worth spending money on even if the return on that purchase won’t be quite as lofty as the S&P.

Investing isn’t always about chasing the highest return. It’s important to consider all your available options before throwing money into something!

The Bottom Line:

Investing is great. We’d love to see everyone invest decent chunks of their income on a regular basis. But you need to ask yourself some of these important questions before jumping in.

While there are some great resources out there, beware of all the headlines promoting short-term trades and risky investment choices. Don’t succumb to the noisiest folks out there. They could lead you astray.

Know your plan, write it down, and stick to it. We want you to be an investor, but we also want you to be an informed investor, knowing how and why you are making the decisions that you make.

Related posts:

• Is a home a good investment?
• Why most people lose money in the stock market
• What to do when the stock market declines

Beer tasting notes:

While talking about the things to consider before investing we each enjoyed an Emergency Drinking Beer by Wild Heaven! And please help us to spread the word by letting friends and family know about How to Money. Hit the share button, subscribe, and give us a quick review in Apple Podcasts! Help us to change the conversation around personal finance.

Best friends out!