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Many people get excited over the idea of investing and the thought of making more money. However, not everyone is in an ideal financial situation where investing makes sense. Don’t let this fool you though because the groundwork for investing is something that everyone can achieve. Investing is one of the best ways to earn financial freedom, but if you do not set yourself up for success, you may end up with failure down the road. Before you start investing, follow these five steps for success.

 

Build a Budget

Rule number one to gaining wealth is having a budget, which should include both short-term and long-term planning. A budget allows you to understand how much money you are earning, how much you’re spending, and what’s leftover. Trimming expenses is another helpful tip for investing. It is also important to consider what more substantial costs you’ll have within the next five years. Brad Kingsley, a financial advisor, recommends that any money you commit to investing shouldn’t be needed for at least five years.

Plan for Emergencies

Unfortunately, unexpected expenses will happen. Most of these unexpected expenses will be time sensitive and required a decent amount of funds. Without an adequate emergency fund, it may be difficult to cover these expenses. Many financial advisors recommend having at least two week’s pay but having a supply of three months worth of living expenses is ideal. While this may seem like a long period of time, this can help in case you lose your job or have a significant expense. To start building an emergency fund, start with setting aside a $1,000 and growing the account from there.

Pay Off Debt

If you have money to invest, then you have money to pay off your debt. While some debt is ok, such as a mortgage, credit card debt can hinder your financial freedom. Credit cards charge high-interest rates, and the national average interest rate is currently 16 percent. While investing can make you money, it’s not a sure thing. Debt is a sure thing, and it’s crucial to pay off debt before you begin investing.

Live Within Your Means

This is crucial. Do not spend more than you make! Better still, spend less than you make and save what is left over. This is also a sure way to create wealth and financial independence. Once you get used to a certain lifestyle, it is very hard to go back, so don’t go there! Set a target, say 10 percent of your take home pay and stick to it.

Understand the Basics

Having a basic understanding of investing is essential because jumping into investments before you know what you are doing can be dangerous. Using a financial advisor is a great tool, but you should also take the time to educate yourself.

 

Be sure to check back soon for a blog series covering the basics of investing!

 

Robert Desai is an established equities investor located in the Greater Boston Area. Read more of his investment blogs or check out his Twitter!


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