{"id":5408,"date":"2015-02-11T05:27:09","date_gmt":"2015-02-11T13:27:09","guid":{"rendered":"http:\/\/blog.paladinregistry.com\/?p=5408"},"modified":"2015-02-11T05:57:38","modified_gmt":"2015-02-11T13:57:38","slug":"ready-to-invest","status":"publish","type":"post","link":"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/","title":{"rendered":"Am I Ready to Invest?"},"content":{"rendered":"

\"ready<\/a>Plenty of times I have been approached by young couples in their 20s or 30s\u00a0with this question – \u201cI think we should start investing, what do we do<\/span><\/a><\/span>?\u201d\u00a0 I answer their question with a question: \u201cAre you ready to invest?\u201d\u00a0 Typically I\u2019m met with a stare and a reply that goes like this \u2013 \u201cUmm, I dunno, I\u2019ve been told I should save for retirement, so I need to invest, right?\u201d<\/p>\n

\u201cCorrect\u201d I tell them, \u201cbut first you have to take two steps back before you know if you\u2019re ready to invest<\/span><\/a><\/span> or not.\u201d\u00a0 Then I show them my Financial Planning Order of Operations.\u00a0 It\u2019s a one page handout that looks somewhat like this:<\/p>\n

    \n
  1. Eliminate your bad debt<\/strong><\/em><\/li>\n
  2. Establish your rainy day fund<\/strong><\/em><\/li>\n
  3. Invest<\/strong><\/em><\/li>\n<\/ol>\n

    More often than not young couples think they\u2019re ready for step 3, but when I dig a little deeper, I see they\u2019re still spinning their wheels with step 1 and don\u2019t know much about step 2, either.\u00a0 Step 1 – your bad debt – is typically your high interest debt, which generally comes in the form of credit cards.<\/p>\n

    Borrowing on your credit card, which happens when you don\u2019t pay your bill down to zero by the due date, often comes with extremely<\/em> high interest rates.\u00a0 The high rates are for two main reasons: 1) the debt is unsecured, meaning it\u2019s not backed by a house like with a mortgage or a car like with an auto loan; if you don\u2019t pay your debt, the credit card company won\u2019t come and take the groceries you bought, whereas the bank will come and take your house if you don\u2019t pay the mortgage, and 2) they make credit card companies a ton of money.<\/p>\n

    I don\u2019t blame young couples for thinking they\u2019re ready for step 3 and being unaware of steps 1 & 2. \u00a0I feel our school systems have failed to teach us a basic understanding of how money operates.\u00a0 Here\u2019s my attempt to teach in three paragraphs what we didn\u2019t learn in nearly two decades of school.<\/p>\n

    When you lend at 7 cents on the dollar and you borrow at 22 cents on the dollar you\u2019re spinning your wheels; you\u2019re losing 15 cents on every dollar you put to work for you.\u00a0 Case in point, wanting to invest (lending) to earn 7% on your investment while you\u2019re still borrowing at 22% by not paying off your bad debt first.<\/p>\n

    Earning 7% or borrowing at 22% is not guaranteed for either, but we do know that on average we can\u2019t earn rates of return on our investments comparable to those charged on carrying credit card debt.\u00a0 Therefore, our best investment becomes completely paying off our bad debt.\u00a0 The best part about it, not only are you free of debt, but you\u2019ve just guaranteed yourself an incredible return, and getting a return on your money is why you wanted to invest in the first place, right?\u00a0 Well, here\u2019s an excellent return sitting right in front of you. When you pay off a credit card that charges you 22% you just got yourself a 22% return and that\u2019s very hard to get with investing.<\/p>\n

    What\u2019s the best approach to tackle your bad debt?\u00a0 I can\u2019t paint with a broad brush because everyone\u2019s situation is different, but a good start is to rank your bad debt from highest interest rate to lowest interest rate then cut back, scrimp and save and put everything you can towards your highest interest rate debt while still making your minimum payments everywhere else so you avoid late fees and additional interest rate bumps.\u00a0 When that highest interest rate debt is paid off then move onto the next one until you are completely free of bad debt.<\/p>\n

    And now you\u2019re ready to establish your rainy day fund<\/span><\/a><\/span>.\u00a0 Your rainy day fund is simply cash in the bank or in your mattress if you\u2019re one of those people.\u00a0 The unexpected happens \u2013 it\u2019s one of the few things that can be expected in life \u2013 it\u2019s a job loss, an accident, an appliance going out, or your car not starting.\u00a0 You need your rainy day fund to cover these expenses so you don\u2019t go back into credit card debt.\u00a0 But you also need your rainy day fund to cover several months of your living expenses if one of these unexpected happenings prevents money from coming in.<\/p>\n

    A general guideline for your rainy day fund is your average monthly living expenses multiplied by 3 if you\u2019re single, 6 if you have a dependent, and 8 or more for a single income family or larger family.\u00a0 Obviously, the more months you have saved up the more comfortable your situation and the easier it is for you to avoid something unexpected completely derailing your life.<\/p>\n

    You do keep track of your expenses, don\u2019t you?\u00a0<\/strong><\/em><\/p>\n

    Steps 1 & 2 are critical; they are the foundation upon which step 3 is built.\u00a0 They\u2019re not completed overnight and they take time, but when you\u2019ve eliminated your bad debt and you\u2019ve established your rainy day fund only then can you answer \u201cYes\u201d when asked \u201cAre you ready to invest?\u201d<\/p>\n

    To learn more about Michael Pensinger, view his Paladin Registry profile<\/span><\/a><\/span>.<\/strong><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

    Plenty of times I have been approached by young couples in their 20s or 30s\u00a0with this question – \u201cI think we should start investing, what do we do?\u201d\u00a0 I answer their question with a question: \u201cAre you ready to invest?\u201d\u00a0 Typically I\u2019m met with a stare and a reply that goes like this \u2013 \u201cUmm, I dunno, I\u2019ve been told I should save for retirement, so I need to invest,<\/p>\n","protected":false},"author":55,"featured_media":5413,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[395],"tags":[],"class_list":["post-5408","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing"],"yoast_head":"\nAm I Ready to Invest?<\/title>\n<meta name=\"description\" content=\"We should start investing. 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What do we do?\u201d I answer their question with a question: \u201cAre you ready to invest?\u201d and I'm met with a stare and a "I dunno".\" \/>\n<meta property=\"og:url\" content=\"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/\" \/>\n<meta property=\"og:site_name\" content=\"Paladin Registry Blog\" \/>\n<meta property=\"article:author\" content=\"https:\/\/www.facebook.com\/pensingerfinancial\" \/>\n<meta property=\"article:published_time\" content=\"2015-02-11T13:27:09+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2015-02-11T13:57:38+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2015\/02\/ready-to-invest.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"620\" \/>\n\t<meta property=\"og:image:height\" content=\"360\" \/>\n\t<meta property=\"og:image:type\" content=\"image\/jpeg\" \/>\n<meta name=\"author\" content=\"Michael Pensinger\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:creator\" content=\"@PensingerFincl\" \/>\n<meta name=\"twitter:site\" content=\"@PaladinRegistry\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Michael Pensinger\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"4 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"WebPage\",\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/\",\"url\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/\",\"name\":\"Am I Ready to Invest?\",\"isPartOf\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#website\"},\"primaryImageOfPage\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/#primaryimage\"},\"image\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/investing\/ready-to-invest\/#primaryimage\"},\"thumbnailUrl\":\"https:\/\/www.paladinregistry.com\/blog\/wp-content\/uploads\/2015\/02\/ready-to-invest.jpg\",\"datePublished\":\"2015-02-11T13:27:09+00:00\",\"dateModified\":\"2015-02-11T13:57:38+00:00\",\"author\":{\"@id\":\"https:\/\/www.paladinregistry.com\/blog\/#\/schema\/person\/9db3291c27e1e28f6cbdc1cff05c4693\"},\"description\":\"We should start investing. 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