You’re ready to make your money work for you. Major props. But before you dive into the world of stocks, bonds, and other assets, you’re going to want to make sure your financial house is in order. Think: Conquering the paycheck-to-paycheck cycle and cultivating an investor’s mindset. To learn all about how new investors can build better financial habits, we chatted with Carmen Perez, founder and CEO of the budgeting app Much.
How can I make room in my budget for investing?
First, you need to break the paycheck-to-paycheck cycle. Because if you stay in this cycle, you're not going to free up enough money to reach the goals that you have envisioned in your head. When I say paycheck-to-paycheck cycle, I mean having a gap between your expenses and your income and lacking disposable income that you can put to work for you. When you break the cycle, then you can start focusing on the things that really matter, like investing more and paying down debt. Some people need to be better organized with their money, but others are just not making enough because their bills far exceed their income. If you’re in that second camp, I say, you need to focus on increasing your income, full stop.
Breaking that paycheck-to-paycheck cycle first is foundational before investing because then you're free from the financial stress that the paycheck-to-paycheck cycle creates. Once you’re done with that cycle and have some disposable income, you can prioritize your top money goals. For example, if you have $100 in disposable income, you can set aside percentages of that money for your primary goal and your secondary goal. That could look like 70% (aka $70) going toward investing and 30% ($30) toward paying down debt.
What are your tips for staying calm when my investments dip in value?
Zoom out. While historical gains are never an indication of future returns, historical data is the best thing we have to lean on. Ebbs and flows are natural, but historically, the market has gone up. So lean into that, and continue to educate yourself about that.
Be consistent with your investments. A lot of people like to call this dollar-cost averaging. In the event that you see nothing but valleys, look at it as a discount or a sale at your favorite store. You're able to accumulate more shares at a cheaper price. View market dips as an opportunity to buy more, instead of having a scarcity mindset.
Cultivate a long-term investor mindset. Focus on the long term. Change your perspective: you're not going to plant a seed, and then you go and check it the next day. It takes some time and consistency in order for that acorn to grow.
What should I look for when choosing investments?
I encourage folks to get into exchange-traded funds (aka ETFs) or index funds, which allow you to invest in a lot of stocks, bonds, and other assets at once vs. committing to just one. But if you're looking for an individual stock, I would say, some questions to ask yourself are: Are you familiar with the company? What’s their share price, and where has it been for the past year? Are you familiar with the sector and the news around that particular sector? Look at your investment as you being a stakeholder in that company. Are you excited about this company? How are the returns? Do you have faith that the stock will continue to go up? Do you understand the leadership and more importantly, just the sector and the news around it? If you are looking to invest in single stocks, don't go on the hype. Familiarize yourself with the industry, the industry news around that company, and what its future looks like in the next five to 10 years.
This interview has been edited and condensed for clarity.
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