Advice I Gave My Friend Who Started Investing

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Taking real, intentional steps towards being responsible for your finances and financial future is a true test of maturity. Far too many Americans let their money lead them astray, instead of taking full command over how their money is utilized. I made many financial mistakes as a young person and going into adulthood, but luckily once I started making a full-time income, I started down the path to financial recovery and eventually towards financial prosperity.

With this change in my life, some of my friends began to notice, and eventually, some of them started adopting good habits. However, one of my friends decided to jump the gun and decided to start investing his minimal income directly into single stocks and eventually trying to day trade. With this came obvious losses, then a moment of clarity where he finally asked for some advice. I think the steps I took after much research and trial-and-error are a good method of determining your financial goals and how you want to get there. So let me give you the same insight I gave my close friend who is trying to improve his long term financial health.

Disclaimer: I am not a certified or professional financial expert and these steps should only be treated as suggestions, not guarantees. You should conduct your own research and consider contacting a financial expert if you want to go further.

Let’s talk about your debt

Dave Ramsey says it best, debt is the number one prevention of wealth accumulation. Student loans and consumer debt have run amok in the United States thanks to unhealthy spending habits and easily obtainable credit. The truth that few will disagree on is that no debt is good debt, and if you don’t have your debt manageable or completely out of the way, you are essentially betting against your own financial prosperity in the future.

Let’s set up that emergency fund

Why do some people refer to an emergency fund as a “Rainy Day Fund”? It’s because we know that sometime in the near future, it’s going to rain, so we might as well prepare for it now so we don’t end up soaking and miserable. From my own research, I found financial experts all agree that most Americans at a minimum should have $1,000 set aside in a savings account for emergency situations. No, an emergency fund is not a “I have no beer money” or “I really want to buy something” fund, it is meant for health emergencies at best.

After setting aside $1,000 in your emergency fund, get started on saving between three to six months of earned income in case you find yourself fired, laid off, or let go from your regular job. This will cushion you while you’re looking for work so you don’t need to even consider touching your investments. Understand that when emergencies come, and they always do, liquid cash is your best friend.

Now we need to talk retirement

Investing in a 401k is the best investment you can make in yourself. Talk to your employer if you haven’t already about starting a retirement account so they can automatically take money from your paycheck and invest it for you so you don’t even have to worry about it. Some employers even offering matching 401k contributions up to a certain amount, which is essentially free money, so consider that as an option as well.

Can you pick up a side gig?

If you’re young or still in a phase where you can work more than forty hours a week, side gigs are a great way to build up your savings as well as have extra cash for investments.

Single stocks and mutual funds

Lastly, trading or investing in single stocks or mutual funds should only be an option if you’re willing to put down money you don’t need immediately or money you’re ok with losing completely. I won’t go into the pros and cons of investing like this, but I strongly suggest completing the previous steps before even getting involved in stocks. To play it safe and reliably, a managed mutual fund through a reliable bank or brokerage is the best bet as long as you make consistent, long term contributions. You should not even think about this stuff unless you have set in place good saving habits as a platform of financial security.