Investing | 5 Steps for Getting Started

Step number one.

By far one of the most important things you can do before anything else is to start tracking and budgeting your spending.

[thunder rumbling] Whoa, whoa, hey, listen.

It's going to be all right.

It may not be fun to internalize how much money you've been spending each month, but ask yourself this: Would you rather face the anxiety now or further down the road after you've let your spending go unchecked for another year or so? After all, if you're outspending the money you've been making on your investments, then you're negating the benefit it provides, so tracking your expenses is a must.

Luckily, there are a number of ways to do this.

There are phone applications that help you budget and categorize your spending, and some banks automatically summarize your spending information online.

Personally, I'd suggest doing it yourself, and to help you get started, I've included a link down below to a budgeting template that I personally use.

Basically, it takes your income and lets you budget for your necessary expenses, discretionary expenses, and savings.

From there, the categories are further segmented into more specific groups, all of which you can customize.

So to use it, start tracking the monthly totals you're spending on each subcategory for a few months.

Once you have several rows of data, set up your budget.

Allocate a percentage of your paycheck to each group, including your savings.

This is where you have the opportunity to really challenge yourself.

And if you weren't saving before, look for areas where you can trim the fat to build up your saving allocation.

If you want a point of reference, you can follow the 50/30/20 rule.

This entails spending a max of 50% on necessities, 30% on discretionary, and 20% on savings.

After everything's set up, take the time once a month to add a new line of spending information, and do your best to come in under budget for each category.

If you use a debit or a credit card, filling out this table should take no longer than five minutes, and it will help you keep a pulse on your finances.

So once you've got a grasp on how much money you're spending, it's time for step two: Pay off your debt.

Whether you have a credit card balance, a student loan, or a line of credit, you should have a plan for paying off the money you owe.

Not sure if you should allocate money to investing or to debts? Well, the decision will depend on your unique circumstances, as well as if you live in Canada or the US because of tax rules.

But generally speaking, any debt with a high after-tax interest rate, say above 5%, should be paid off before investing.

Why? Well, think of it this way.

If you pay off a credit card balance rather than investing, you are effectively earning a 20% guaranteed return since you're avoiding a 20% cost from paying off the balance.