Want to Be a Serious Investor? Nail the Basics First.
In my next free training, we will be talking about how women can become serious investors. I thought we should first talk about the necessary steps that women need to take with their personal finances in order to become serious investors. There is a progression and a path each of us has to take and skills to master. Just like you need training before you get in a car with manual transmission, you need to lay down some basics before you just “grind it ‘till you find it”. If you are in a place where you have all these basics down, then you are in fact ready to be a serious investor.
You have a banking relationship. This is as basic as it sounds. It means you have a checking, savings, and credit card held with a US banking institution. In order to be creditworthy (a way to use other people’s money to build wealth over time), you must have a banking relationship and show that you are somebody worth doing business with. Unless you have a bevy of wealthy family and friends willing to be your bank, this is mandatory.
You pay all your bills in full and on time. All of them. Always. If you haven’t mastered this, your credit score is suffering and you are not managing your money correctly.
You have an HYSA. This is a high-yield savings account and it is usually provided by online banking institutions. They pay a significant amount of interest, currently above 4%. Check to see what your bank is paying in interest in your savings account. If it is below 4%, you do not have an HYSA and need to get one. In this savings account, you hold a minimum of 3 months of mandatory expenses for emergencies.
You have your own credit card. You have built credit for yourself through credit cards or lines of credit. Being an authorized user on someone else’s card is not owning credit. Make sure you have developed your own lines of credit. This helps tremendously when you want to borrow other people’s money to build assets and wealth.
You know your FICO. You are able to check it regularly and you are above a 720 credit score. If your credit score is lower, you have work to do. You need to have additional lines of credit and pay it all in-full and on-time. This takes time to develop so make it a priority. This is the main factor that allows you to use other people’s money to make more money. In addition to knowing your FICO, you also check your credit report every year to make sure you do not have any fraudulent accounts or incorrect reporting (annualcreditreport.com is the government site for free annual credit reports).
You have basic insurance. If you got sick, in a car wreck, or your house burned down, you need to have coverage. The basics of insurance coverage are auto, home, and health. Also, if you have children or other dependents, a term life insurance policy will provide your loved ones financial security if you die. Nothing can put you in financial ruin faster than a horrible incident that is not insured. Insurance is not an investment in the above examples. It is protection against disasters.
You have a retirement account. If you have a 401k from work, you have a retirement account. If you have an old 401k from a past job, you have a retirement account. If you have never opened an employer-sponsored retirement account, you need to open a traditional or Roth IRA (individual retirement account). The best scenario is to have an employer who will match money you put into your retirement account. Never turn down free money.
You know how to budget. Not only do you know how to budget, you do it on a regular basis to ensure you are not spending more than you make. Your budget should be helping you to live within your means. When you align your spending to your personal values to cover mandatory expenses and savings contributions, you then are able to manage your discretionary spending in a way that is right for you. Having a spending plan (upgraded budget) creates a situation where you are in control of your money, not the other way around.
You have no bad debt. Simply put, bad debt is spent on things that decrease in value over time or are immediately consumed. So, if you have debt for expensive dinners, vacations, boob jobs, shoes, or car repairs, you have bad debt. Bad debt is usually on a car loan or credit cards. Bad debt is not helping you to build wealth, it is holding you back. If you have it, you cannot be a serious investor until you get rid of this.
You know your net worth. This is a very simple project that you only have to do once and update annually. You list out everything you own and its current value. Then, you list out everything you owe and what the payoff amount is right now. You subtract what you owe from what you own and you have your net worth. This gives you a very clear picture of your financial life. This should be updated every year to measure your success and help you set annual goals.
You set financial goals. Basic financial goals are to grow assets and pay off debts. A person who is ready to be a serious investor knows ways to do both these things and puts together a plan to increase net worth over time. Ideally, if you are in a partnership, you discuss financial goals together and work on them as a team.
When you have all the above items fully mastered, you are ready to seriously build wealth. All of this can be accomplished whether you make a lot or a little bit of money. Trust me, I have seen many “wealthy” people who do not have the above items nailed and I have seen people with very limited resources make it work so they can invest and build wealth. If you need help with any of the list above, I am here to guide you.