I find it amazing that we teach kids how to find the area of a triangle or why you shouldn’t use the passive voice, but we don’t teach them how money works. This blog series is a checklist to help you to make a start with your investments – should be fun!
Don’t worry, I’m not going to talk to you like a child. My point is that as far as life skills go, being able to put your money to work for the future is up there as pretty important, and we should at least give young adults some grounding in this stuff.
But we don’t and hence there’s a gap to fill. Most beginner investors won’t be able to afford a financial adviser, and they don’t really need one anyway. My purpose is to give you a step-by-step guide to setting up your first investment, whether you’re 20 for 50.
Pay off Your Debts and Build an Emergency Fund First
I get asked all the time about starting to invest while still paying off debt. There are always exceptions to this rule but generally speaking you should be free of bad debt before you begin investing.
What do I mean by bad debt? My definition of bad debt is debt which has a high interest rate and which is used to buy things which decrease in value. So buying a TV with a credit card is bad debt. Running an overdraft because you don't have sufficient control over your budget is bad debt. Essentially, we are talking credit cards, overdraft, personal loans and buy now, pay later schemes.
We are not talking about student loans or mortgages here. Those are used to buy assets (or an education) that should increase in value over time. Hence they are deemed to be good debt. I am very clear about the need to get rid of bad debt as a matter of urgency when you begin to take control of your financial life.
I think I said in an earlier post that starting to invest while still paying down debt is like running a race with your shoelaces tied together. You can make some progress, but you will be very much hampered and unfocused. Finish paying down your debt first and then you will be free to pursue your investing journey properly.
You should also have some cash aside which you are NOT going to invest – that’s an emergency fund. It’s there to get you out of trouble if something unexpected happens. You don’t want to be encashing your shiny new investment if the car needs work or your boiler blows up. Try to get a good figure behind you before you start to invest. Something in the order of 3-6 months of minimum monthly expenditure is a good place to be.
Read the Simple Path to Wealth
The Simple Path to Wealth by JL Collins is, to my mind, the best personal finance book ever written – I interviewed Jim Collins in a previous episode of the podcast. Jim wrote the book to codify his teaching about how to build wealth for his daughter, who at the time was not interested in that subject at all.
It is written for beginners, but the only issue I have with it is that it is exclusively US-focused. Given that most people listening to my podcast and reading my blogs are UK-based, that’s something to bear in mind.
After that, if you want to read more on the subject of investing, I suggest that you read my own book, The Meaningful Money Handbook, and then Investing Demystified by Lars Kroijer.
You should never stop learning about this stuff – it is too important ever to think that you know it all.
