If you have money sitting around your house or in a savings account, you may be able to do better in terms of getting more interest. There are many ways to earn more income on your money. However, not everyone is in a position where they should start investing. For some people, there may be more important decisions to make.
Having considerable debt is one strong reason you should not start investing yet. Eliminating debt should take the first priority when it comes to good financial management.
Debt (particularly credit card debt) often comes with double-digit interest rates. The interest you are losing each month because of debt is likely higher than what you could gain on investments. This means you are paying out more than you could bring in through an investment.
Even if you consolidate your debt by getting a personal loan, which will lower your interest rate, it will not be low enough to offset the earnings from investments. Before investing any money, seek to eliminate all debt, with the possible exceptions of a mortgage and car loan.
You can pay your debt down faster if you put a hold on buying non-essential items. You can probably cut back on other expenses as well. Also, avoid putting any more money on credit cards – which leads to more debt and interest.
No Emergency Money
Another thing that you need to have before investing money is to have some money set aside for emergencies. This should also be a priority because you cannot put emergencies on hold. They come unexpected and the results can never be predicted. Emergencies can come in the form of a car breaking down or getting in a wreck, a medical emergency that may result in a hospitalization, or even the death of someone in the family – or even you.
Putting money away for an emergency means it needs to be readily available. A savings account will enable you to earn some interest on the money. This needs to be a priority over investments because, without it, you may need to put the charge on a credit card or take out a loan to cover the emergency – which would put you further in debt.
When starting to put money into an emergency fund, you need to aim to get $1,000. Once that goal is reached, seek to put away the equivalent of six months of income; then work toward having a year’s worth of income set aside. This year, many people have found that their little bit of savings was not enough to prepare them for long-term unemployment or being unable to find a job.
Money for Retirement
It is also a good idea to put some money aside toward retirement. If your place of work offers such a plan, be sure to take part in it – especially if they offer to put matching funds in it. This is “free money” and you do not want to miss the opportunity to work toward retirement and possibly get tax deductions.
Set Some Goals
Even before you start investing anything, you need to determine what you are going to do with the returns on your investments. While you could save toward retirement, you also may have some short term goals. There is no limit to what you might plan to do with it, but it will depend on how much you can invest. Will you buy a house with it, a boat, get a degree – or another one, take a vacation, etc.? The goal could make saving money easier – and it is an investment on its own.