9 Things People Who Are Good with Money Do Before They Invest

Building a firm financial foundation puts you in a better position to stick to your investing strategy.
Updated Dec. 19, 2023
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Let’s be honest — investing sounds a lot sexier than building an emergency fund. But the truth is that many people get into the stock market before they’re financially ready for it, and while the opportunity for financial freedom is appealing, the risks associated with investing may end up causing more problems than they solve.  

Investing is more accessible than it ever has been, with more and more brokers offering commission-free trades and low or even no minimum opening balance requirements. The rise of fractional shares has also made it easier to invest with less money. But before you try to get in on the next Apple or Tesla stock, it’s important to make a few other money moves to build a foundation.

9 financial steps to take before you invest

It can be frustrating to see the stock market rise if you’re not benefiting from those gains, especially if it feels like everyone around you is. But while we’re still experiencing the longest-running bull market in history, stocks don’t always go up in the short term. Taking the right steps now to shore up your finances can help ensure you’re ready for both the ups and downs.

Build an emergency fund

One of the most important things you can do for your financial plan is to establish an emergency fund.

An emergency fund gives you the safety net you need if something goes wrong, whether it’s your car breaking down, your home needing repairs, or losing your job. If you put that money in the stock market and your investment backfires, you may not have as much as you need to weather the storm.

As a result, it’s best to store your emergency savings in an account that offers safety and liquidity. A high-yield savings account is often the best savings account for building your emergency fund.

Many financial experts recommend having at least three to six months’ worth of basic expenses stashed away in an emergency fund. But you don’t necessarily need to max that out to feel secure. Get to a point where you feel comfortable, and you can start working on other steps while still building your emergency savings little by little.

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Max out your 401(k) match

If you have an employer-sponsored 401(k), check to see if your company offers a matching contribution. If it does, it should be a top priority to save enough to max out that match. For example, if your company will match your contributions dollar for dollar up to 3% of your salary, that’s an immediate 100% return on all the money you put into your retirement account up to that threshold—you’ll have a hard time finding anything in the stock market (or anywhere else for that matter) that can do that.

The only time to think twice about this step is if your employer has a vesting schedule for its matching contributions. With a vesting schedule, you don’t actually own the money your employer contributes until you’ve worked at the company for a certain amount of time. In some cases, you may receive the full amount at one time in the future or you might get a percentage for each year of service.

If your employer has a vesting schedule and you don’t anticipate staying long enough to get any of it, the benefits may not be there.

Work toward a robust retirement savings plan

Financial experts recommend saving 15% of your gross income toward retirement. That may not be possible right now, but it’s important to make it a priority in your financial planning process.

For example, you may start out at 5% and increase your contributions by 1% or 2% every year. Some of the more popular ways you can contribute to your retirement include a 401(k) account or individual retirement account. Look at your options and start thinking about how you can achieve your retirement goals.

Also, remember that the 15% figure is just a rule of thumb. Consider working with a financial advisor that can help you determine exactly how much you should save based on your retirement goals.

Pay off high-interest debt

Financial advisors often use 7% as the long-term expected return in the stock market. Although that’s not necessarily what you can expect from every stock, it’s still a good measure to use when deciding how to prioritize where you put your money.

It’s especially important to consider if you have high-interest debts like credit cards. These debts typically charge higher interest rates than the return you can expect from the stock market, and paying off a credit card balance with a 20% APR will effectively give you a better return than earning 7% in the stock market.

If you’re planning to pay down credit card debt, a balance transfer credit card or debt consolidation loan could help. With the former, you can get a 0% APR promotion for a set period, during which you can pay off your balance interest-free. The latter won’t give you a 0% APR, but debt consolidation loans often charge lower interest rates than credit cards, and they also give you a set repayment term, which can be helpful if you’re struggling to stay motivated. If you’re interested in learning more about these options, check out our picks for the best balance transfer cards and the best personal loans.

Check out our Citi Double Cash Card review.

Make sure you’re properly insured

If there’s anything less exciting than investing money, it’s insurance. But if you die or become disabled, it’s unlikely you’ll have enough money in the stock market to protect you and your loved ones.

Life insurance is important for most people, even if it’s just enough of a benefit to cover your burial costs. But if you have a partner or children, you may want to purchase enough coverage to provide for lost income, debt payments, education savings, and more. If you’re interested in applying for coverage, check out our picks for the best life insurance companies.

Disability insurance is arguably more important than life insurance because you’re much more likely to become disabled than die prematurely. According to the Council for Disability Awareness, today’s 20-year-olds have a 25% chance of becoming disabled before they retire. Long-term disability insurance can protect you if you lose your ability to work because of your disability.

Other important insurance policies to consider include short-term disability insurance, auto insurance, health insurance, and homeowners or renters insurance.

Take advantage of health accounts

Health savings accounts and flexible spending accounts allow you to set aside money for qualified medical expenses on a tax-free basis.

Unfortunately, not everyone qualifies for one of these accounts. You can only get an FSA, for instance, if your employer offers one as an employee benefit. With an HSA, you have to have a high-deductible health plan.

If you’re eligible to open and contribute to one of these accounts, though, you could potentially save hundreds or even thousands of dollars in taxes every year. And with an HSA, you may even have the option to invest those funds on a tax-free basis and include the account in your retirement savings plan.

Determine your goals

Once you’ve established a good financial foundation, it’s now time to consider turning toward investing. Before you start, though, it’s important to think about why you want to invest. For example:

  • Are you hoping to build an income stream through dividends or bond payments?
  • Do you want to trade frequently or buy and hold your investments?
  • Are you investing to make money for a specific reason, such as taking a vacation, improving your home or buying a new house?
  • Do you want to manage your investments on your own or outsource them to a financial advisor or robo-advisor?
  • How aggressive do you want to be in your investment strategy?

Ask yourself these questions as you develop your investment goals. Try to answer them as specifically as possible to ensure you stay on track and can evaluate from time to time based on your original expectations.

Figure out what you want to invest in

For many people, investing is synonymous with stocks. But you don’t have to just invest in individual companies, and some may choose not to invest in stocks at all.

For example, you might choose to invest in index mutual funds, which track major indexes like the S&P 500. Alternatively, you could opt for exchange-traded funds, which allow you to invest in a variety of stocks, bonds, precious metals, and other securities.

Although funds typically don’t generate the same potential returns as individual stocks, they offer more diversification, which could provide a level of protection against market volatility. However, it’s important to note that all investments come with risk.

If you’re a more experienced investor, you might also look into buying and selling options to supplement your regular trading.

If you’re not sure yet what you want to invest in, take some time to do some research on the different options available to you. Even if you’re sure you want to invest in a specific stock or fund, do your due diligence to make sure it’s a sound investment choice. The best brokerage accounts provide a wealth of information and resources to help investors with this process.

Choose a platform that meets your needs

The number of investment platforms to choose from can be overwhelming. In addition to some of the major brokers like Fidelity and Vanguard, there are also newer platforms like Robinhood, Stash, and Acorns.

Each broker has benefits and drawbacks, and some are better than others for certain types of investors and investment goals. Take the time to shop around and compare brokers to find the best one for you. Factors to consider include:

  • Cost
  • Resources
  • Account options
  • Advisory services
  • Investment options
  • Minimum deposit

Also, consider reading customer reviews to find out about certain aspects of the experience that are important to you. For example, if customer service is a top priority, steer clear of brokers that have a poor track record based on previous customer reviews.

The bottom line

Investing for the future is an exciting and important part of a financial plan, but there are some important steps to consider taking before you get to that point. As you work on establishing your financial plan, consider building an emergency fund and applying for insurance, getting out of debt and increasing your cash flow, and prioritizing saving for retirement over other short-term investing goals.

The process of getting your finances ready for investing can take some time, but once you have a solid foundation, you’ll be able to afford to take on more risks, which could potentially result in better returns. However, as we mentioned earlier, all investments come with risk.

If you’re thinking about investing in the stock market, check out our picks for the best investment apps.

Author Details

Ben Luthi Ben is a personal finance and travel writer who loves helping people achieve their money goals. Along with FinanceBuzz, his writing has also been featured on U.S. News, NerdWallet, Experian, Credit Karma, and more.

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