5 Actions to Take Before Even Considering Investing
For many, investing sounds like a way to get rich fast. People see insane returns of FAANG stocks and bitcoin and think that's the ticket to wealth.
For some, it is.
For those who have truly built wealth, there are many things that come before investing.
First of all, most people shouldn't expect to earn triple-digit - or even double-digit - returns into perpetuity. Depending on how far you go back, the average return for the S&P 500 is roughly 10%. Bond returns, even less. So a well diversified investor holding a balanced portfolio might reasonably expect a 6-8% return over the long run.
For someone with $10,000 to invest, that equates to a $600-800 annual return. Hell, even if that person could accomplish 100% returns he'd only gain $10,000 in year one. Nice, but not enough to become rich unless by some miracle that feat can be repeated numerous times.
Investing is something you do with accumulated wealth. It's a way to get your money working for you and to maintain your purchasing power. But before you can do that you must first build wealth through simple, deliberate actions.
Action 1: Spend Less Than You Earn
Seems simple. But many don't live by this rule and rely on their credit cards to cover regular expenses.
Nobody gets rich giving all their money away. It's so simple I feel stupid for saying it, but here we are. To accumulate wealth you first need to spend less than you earn.
Action 2: Pay Off Credit Card Debt
If you have a credit card balance you're likely paying around 20% interest. You'll never beat that return in the market with any consistency. So do yourself a favor and pay off that credit card debt before investing.
Action 3: Aggressively Save
Simply spending more than you earn isn't enough. Think about it this way: every dollar you save is a dollar less you have to earn in the future. The more you can save now, the closer you will get to financial independence.
While saving 10% of your paycheck might seem daunting, it's a standard rule of thumb. However, I suggest saving as aggressively as possible. 10% should be the bare minimum.
Action 4: Don't Leave Free Money On The Table
Many employers have share purchase or retirement savings matching plans. I've known so many people who have lost this free money out of sheer laziness. People walk away from a 20, 30, 50% match - equivalent to a 20, 30, 50% instant return - yet spend their energy trying to invest in the next Tesla.
Moreover, these employee savings plans, once set up, are usually a decision-free way to build wealth since the contributions are taken off your paycheck before you even realize the money even existed.
Action 5: Earn More Money
The average age of Robinhood user is 31, and the average account size is $1000-5000. Such small account sizes suggest these people don't have alot of wealth.
These young people are wasting their time chasing stocks when they'd get a much higher ROI investing in themselves. At age 31, most people are near the bottom of the corporate ladder. Instead of putting $1000 into Air BnB stock, spend that money on a Python course, Canadian Securities Course or CFA designation.
A little self-improvement at such a young age will pay off multiple times over a lifetime.