Coach’s Corner-“First Priorities of Investing”

When you think of “Investing,” your mind may immediately wander into topics such as the stock market, real estate, bitcoin, or marijuana stocks, but you need to make sure you can walk before you sprint!

The first thing you should consider doing is investing in yourself first. This means establishing a savings account for emergency use.

As we all know (and as many of us have experienced!), life tends to throw us a curveball every now and then. Whether it’s a problem with your home or vehicle, unexpected medical bills, or some other wallet-depleting circumstance, establishing a cushion in your savings account needs to be a top priority.

But how much should you save?  Click here to listen and learn about how much you should have in your Emergency Fund.

The next investment you should make is into a 401k or similar employer-sponsored retirement plan available to you through work. This is especially important if the company has a matching structure, which means they will contribute a certain amount of money to your retirement account as long as you contribute.

If your company does happen to offer a match, and you are NOT participating, you are leaving free money on the table!! Let me explain… If you put in 3% of your annual income into your retirement plan and your employer matches that amount dollar for dollar, that’s a total of 6% of your annual income toward your retirement future.  It’s also a 100% rate-of-return on your money right now, today! So, if you choose not to contribute at all, your employer doesn’t have to contribute either, and you’re missing out on an extra 3% of your income!

At this point, we’ve invested in our short-term security through our emergency fund as well as our longer-term future through the retirement plan at work.  Now we need to tackle one more investment before we can start getting creative; debt.

It doesn’t feel like an investment today but paying off high interest student loans and credit card debt will free up your hard-earned dollars in the future. I want to emphasize a key point here. If you have a mortgage, student loans, or any other debt that has an low interest rate (say…under 4%) and the payments are manageable, I wouldn’t be in a huge rush to pay these off, and here’s why…

The way I see it, if you can earn more on that money in the long-term by investing than the interest rate on the debt you’d be paying off costs you, then you maximize your net profit if you simply make the required payment, instead of going above and beyond and throwing thousands of dollars at your low-interest debt. It should also go without saying that some of these loans can be tax-deductible, depending on your income, so that’s another factor to keep in mind.

Example:

If you have a student loan with a 4% interest rate and your payment every month is $500 and you’re deciding whether or not to add another $500 a month to the payment, I would encourage you to think about whether or not you could earn more than 4% per year (in the long-term, on average) with that $500/m ($6000/yr). If you believe the answer is yes, then it may make sense to save that money into an investment vehicle. And if you’re unsure as to whether it’s tax-deductible (which means the net-after-tax interest rate could be lower), then you need to talk to a qualified financial professional that can help.

Now that you’ve prioritized where your money should go first, the foundation of your financial house is firmly grounded, and we can begin to build the dream home you’ve always wanted. You can start to add shiny windows, spiral staircases, and maybe even take a design risk here or there, but without a strong foundation, it will eventually crumble.

In conclusion, these reasons get us started on why you need to invest in yourself first, save for your short and long-term financial future, pay attention to the “bad debt” in your life, and build that solid financial foundation so you can then have the freedom to construct an investment portfolio which may aim to take more risk and build additional wealth.

Categories: Educational Articles, Market Commentary, Zak Leedom

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