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3 steps to determine whether you’ve earned the right to invest

Your journey on the road to building wealth begins with one question: Have you earned the right to invest?

Even the most ambitious savers need to go through a little bit of prep work before they start socking away cash into a brokerage account, an individual retirement account or any other long-term investment.

“Before you even consider putting an ounce of risk on any of your hard-earned money, you first want to earn the right to invest,” said Douglas A. Boneparth, certified financial planner and president of Bone Fide Wealth in New York.

Here’s what that means.

Call out your goals

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Before investing, you’ll need to think about what you hope to accomplish.

In particular, you’ll need to identify, quantify and then prioritize those goals.

“When do you want to achieve them, and how much will this cost?” asked Boneparth. “Which ones are most important to you?”

Be the boss of your cash flow

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Once you’ve locked down your goals, tighten the reins on your cash flow.

You should have a good understanding of every cent coming into your bank account each month and how you’re spending it.

This is different from budgeting.

“Cash flow is what you actually spend money on, while a budget is what you hope to spend money on,” said Boneparth.

When you reconcile your budget with your actual cash flow — that is, you’ve made an honest assessment of your spending — you can determine how much you can actually save each month.

Build short-term cash

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Go back to your list of goals and pluck out the short-term objectives you’d like to achieve.

For instance, maybe you want to bolster your emergency fund or you want to buy a house some time within the next four years.

“You don’t want to put any risk on these goals,” said Boneparth. Instead, sock away this cash in a checking account, high-yield savings account or a money market fund.

This way, your money isn’t subject to the whims of the stock market, and it’s readily available when you need it.

You’re all set!

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About Virgie Powell

Virgie B. Powell writes for Reiterment Planning and Tax Advice sections in AmericaRichest.

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