Steps to Implement before Starting to Invest

So you want to start investing; fantastic! However, are you actually ready to start investing?

Most people think that once they have some spare money then they should start investing it.

Wrong: there are a few steps you need to take to protect yourself before you start investing:

The 1^st step is to save up an Emergency Fund of £1000 to use in case of emergency expenses.

The 2^nd step is to pay off any Expensive Debt, which is debt with an interest rate of over 5%.

The 3^rd step is to Increase your Emergency Fund to 3-6 months of expenses if you can’t work.

The 4^th step is to make sure you don’t need the cash any time soon, such as a house deposit.

In this post, I talk about why you should have an emergency fund and pay off expensive debt.

I also go through why you should increase your emergency fund and invest for the long term.

Finally, I talk about what to do if you are ready to invest and where to go for more information.

Step 1: Build Up an Emergency Fund of £1000

The first step to take before you start investing is to build up an emergency fund of £1000.

An emergency fund is a savings account that you’ll set up that you can assign this money to.

The reason for this is: what do you do if an expense comes up that you hadn’t had anticipated?

Such expenses could be as follows. They may not be as extreme as these but you get the idea:

• Your washing machine breaks down and you have to replace it with a brand new appliance.
• Your 10 year old car suddenly breaks down and you need to replace the engine for example.
• You start to develop some back pain and you need to go for an expensive private surgery.

Whatever the reason may be, during the years there will be some things that will come up.

The last thing you want to do is have to withdraw that money from your growing investments.

That’s why the 1^st thing you need to do is save an emergency fund before you start investing.

Step 2: Pay Off all Expensive Debt

The second step to take before you start investing is to pay off any expensive debt you have.

‘You mean all debt or just expensive debt? What counts as expensive or non-expensive debt?’

As a rule of thumb, expensive debt is considered debt with an interest rate of 5% or more.

• This could be a student loan for example – my student loan has an interest rate of 6.5%.
• This could be any car finance – you may be making monthly car payments with a high interest.
• You may have card debt – if you’re not paying it off every month you may be accruing interest.

The reason I say expensive debt is because debt with 5% interest starts to compound fast.

For example if you have a mortgage with an interest of 3%, it’s not urgent to pay it off first.

Focus more on student debt, personal loans, and credit cards that come with a high interest.

If you have multiple debt, I have written an article that talks about my debt attack strategy.

Step 3: Increase your Emergency Fund

Once you have paid off expensive debt, the third step is to increase your emergency fund.

How much to increase it by? I suggest to increase it to 3-6 months’ worth of living expenses.

That sounds like a lot of money, why would I increase it that much? Consider the following:

• You suddenly lose your job – you need to be able to pay your bills until you find a new one.
• You are self-employed – you go through a dry spell of work where you’re not making enough.
• You have an emergency in the family – you need to travel and be with them for a few months.

Whatever the reason may be, having an emergency fund of just £1000 would not be enough.

By having that extra buffer, you give yourself a nice safety net in the face of the unknown.

As mentioned, the last thing you want to do is withdraw from your compounding investments.

You need to be able to not touch your investments in the face of these emergency scenarios.

Step 4: Make Sure you Don’t Need the Money Soon

The last thing you need to do is to make sure that you do not need this money any time soon.

What is considered as ‘any time soon’: you mean 1 month, 1 year, 3 years, 5 years, 10 years?

As a rule of thumb, if you need this money within the next 3-5 years, then do not invest yet:

• You need the money for a house deposit – then save this money first and then start investing.
• You need the money for college tuition – then don’t invest it, save it in your savings account.
• You need the money to remodel your house – then don’t invest it if you need it in 3-5 years.

‘But shouldn’t I just invest it in the stock market, let it grow and then pull it out when needed?’

In theory that’s a great idea, but in the short term, there is no predicting what would happen.

The market can crash as soon as you invest and your money goes down over the next 5 years.

Eventually your money will grow, but over the long run; certainly over the next 10 – 15 years.

That’s why if you need the money within the next 3-5 years, then don’t start investing it yet.

You are Ready to Start Investing

So lets recap. You are ready to start investing if you have implemented the following steps:

1. You have built up an emergency fund of at least £1000 for those unexpected expenses.
2. You have paid off all expensive debt, which is debt with an interest rate of 5% or more.
3. You have increased your emergency fund to 3-6 months’ worth of living expenses for bills.
4. You do not need this money any time soon, soon being anytime within the next 3-5 years.

Congrats, you are now ready to start investing in index funds; the best stock market strategy.

To find out more about preparing for investing, check out the book The Simple Path to Wealth.

In this book, the author talks about how he used these principles to achieve early retirement.

Are you ready to start investing? What steps do you need to take? Share in the comments.

If you want to find out more preparing for investing, let me know in the comments below!