Lesson one: establishing a financial foundation
There are a few things to do before you start investing in the stock market. You need to have a grasp on your overall personal finances before moving forward. So let’s go through the things to do.
When it comes to investing, one of the most common rebuttals people say is that they don’t have any money to invest. All their money goes to bills and expenses. They live paycheck to paycheck.
Tracking your expenses
You have to know where your money is going every month. I know it’s easy to say “Well, my checking account is still in the green at the end of the month, so it’s fine!”. No, you need to know exactly how much you are spending in different areas.
Every time I see people talk about tracking their spending, they’re always shocked at just how much they spend on all the little things here and there. The gas station snacks. Late night runs to Target. Doordashing some food when you don’t feel like going out. Subscriptions you’ve forgotten about.
Tracking your spending does not have to be a tedious, time consuming process. A tool I use and love is YNAB (You Need a Budget). It’s a zero-based budgeting tool that basically functions as a digital envelope system.
It costs $99/year to use. Compared to a free budgeting tool like Mint (R.I.P), I’m not bombarded with ads, a janky user interface, or offers for credit cards. So I’m fine with paying to have to deal with all that.
YNAB is all about giving every dollar a job, embracing true expenses, rolling with the punches, and getting a month ahead on your expenses. I’ve saved so much money from using it for the past several years. It’s one of the few financial tools I’ve actually stuck with.
Make no mistake though, this isn’t a YNAB sponsorship, I just really love the tool, lol. If you use my referral link, it gets both of us a free month.
Trim your expenses
You can trim your expenses without deprivation. I know, because I’ve done it, and I’ve seen many others do it.
I like eating out and traveling. It brings me joy. So while I do look for ways to save on those, my top expenses I seek to lower are my other ones. The same goes for you. Prioritize the spending categories you want and figure out how to trim the rest.
There are the “big three” expenses: housing, transportation, and food.
Housing
The flexibility to trim costs in this category is mainly for if you’re a renter. Search on Facebook for ‘[your city] roommates’ or some variation of that to find roommate finder groups. Whether or not you get a roommate, try to also find a cheaper apartment to move to.
Transportation
Uprise is a free app I use to get cash back on my gas and restaurant purchases. I usually end up getting about $40-60 in cash back every year. It’s not much, but it’s something.
Cell phone
People’s cell phone bills are usually larger than they need to be. If you’re not one of the lucky ones who gets to stay on their parents plan, you need to find a way to save in this category.
There are multiple prepaid phone plans where you get the same coverage as the big providers, but at a fraction of the cost. Below, you’ll find more cost-effective cell phone providers for each of the big three wireless carriers.
Use AT&T? Cricket Wireless has a $50/month unlimited data plan for a single line.
Use Verizon? Visible offers a $25/month unlimited data plan for a single line. (Rakuten offers $20 cash back when signing up for Visible)
Use T-Mobile? US Mobile has a $29/month unlimited data plan for a single line.
If you’re someone who is mostly on Wi-Fi and doesn’t need unlimited data, then there are even more savings to be had from the above providers.
Set up an emergency fund
The general guideline is to save up 3-6 months worth of living expenses for your emergency fund. That’s freaking hard to do, I know. Let’s break it down to something simpler.
Saving up one month's worth of living expenses. Basically, getting a month ahead on your bills.
This is where tracking your spending definitely comes in handy. If you’re tracking your spending using something such as YNAB, then you won’t have to take a guess or go through bank and credit card statements to add everything up.
Your emergency fund should be stored in a high-yield savings account. SoFi’s Saving account earns 4.60% APY for those with a monthly direct deposit. Plus, you can create up to 20 savings vaults for different savings goals!
Pay off high-interest debt
There are various opinions about what constitutes “high interest”. I consider it to be any debt that has a 7% or higher interest rate.
Why that number?
Because it is the average (inflation-adjusted) rate of return of the stock market. You don’t want to be losing more money in debt interest than you could be earning from investing.
YNAB has a loan planner where you input your debt details and test out how extra payments can accelerate your debt payoff date. You’ll be able to see the time savings and interest savings from putting extra payments towards your debt.
If you don’t use YNAB, another great tool is Undebt.it. It’s free to use. The dashboard shows all your different debts where you can see interest rate breakdowns and cost saving ideas.
Summary
You need to get your financial ducks in a row before you start investing in the stock market. The advice of tracking your expenses, setting up an emergency fund, and paying off high interest debt are talked about a lot. It’s because they're important. You need to have a plan for them.
Start small. Look at last month’s bank statements and add up where all your money went. Saving for an emergency fund doesn’t have to be looked at as a daunting thing. Make it a goal to at least get one month’s of expenses saved up.
Small steps lead to larger actions and better habits. I’ll see you in the official lesson one of how to invest 🙂