Anyone who can earn the money to start an investment program can successfully invest in stocks. In this article, I walk you through some personal issues you need to resolve before you begin investing. Should you invest your money or pay off your debts? What are your specific financial goals? Can you commit to an investment plan? Get ready to do some serious thinking and acting but don’t worry, this article can help put you on the path to achieving your personal financial goals.

Doing a Reality Check: Are You Free of Major Debt?

Before you consider any type of investment plan, make an honest appraisal of your overall financial situation. You may want to pay off some outstanding debts before you begin a savings and investment program. Because this is a article on investing, I suggest that you look at debt as “reverse investing.” When you owe money, whether to a person or an institution, the lender is making money off of you. If you’re constantly paying more in interest to some lender than you’re making on your savings and investments, you’re going backward in your hopes of building your nest egg for a secure and comfortable future. Not all debt or borrowing is bad, however. You may have borrowed money for your education. You probably got a lower interest rate because of government subsidies. You expect that your enhanced earning power will more than compensate for the interest you pay on your loan. In many cases, this assumption is true. The bottom line regarding debt is that it is a drag and a burden until it is paid off. Unless you can convincingly show that borrowing money now will increase your ability to earn money in the near future, get rid of your debt as soon as you can so that you can start building up your net worth for the future you dream of. Don’t make the mistake of borrowing money to buy stocks. Don’t buy the sales pitch that a particular investment is the opportunity of a lifetime. If you borrow to invest, you incur real debt with no guarantee of possible future gains.

Sizing up credit card debt

Carrying credit card debt is one of contemporary life’s easier entrapments. Credit card companies make getting credit and running up big balances simple and alluring. By adding extra fees, some credit cards penalize users who do not carry balances on their card. Credit card companies want you to carry balances the bigger the better from their point of view. And why not? Credit account interest really pays off for companies issuing cards. Credit card debt can carry interest charges in the 18 to 22% range. Clear up credit card debt before you even think of investing. No reliable way exists for you to earn more on stock investments, even in the short run, than the rate of interest you’re paying on your credit card debt. Paying off your credit card balances even a little at a time is a form of savings. Look at it this way: By paying off only $1,000 a year from a debt of $10,000, you save about $220 at typical credit card interest rates, and your net worth, even though still in negative territory, rises proportionately.

Considering other kinds of debt

If you’re fresh out of college or even a few years into your first job after graduation, you may be carrying a heavy load of student loans that require repayment. The federal government subsidizes and underwrites these loans. Check your interest rates. If you’re paying in the single digits (below 10%), don’t consider these loans as urgent to pay off as credit card debt. Some investments can produce earnings higher than 10%. Therefore, using your money to purchase these investments is wiser than paying off your student loans; you can make more from the investment than you will pay in interest on the loans. You may also be better off by putting your money into investments rather than paying off your installment loan debt (for example, your car loan) if you can earn more on the investment than you would pay in interest on the loan. You can view interest on home mortgages and home equity lines of credit differently. This kind of interest is generally tax-deductible, whereas credit card and installment loan interest is not.

Don’t succumb to the temptation to use your home equity line of credit to finance your investments. Can you afford to lose your home? If not, don’t borrow against it even for an “opportunity of a lifetime.”

Setting Your Goals

Setting goals sounds easy. “I want to be rich and retire by the time I’m 50.” But is this statement a goal or a fantasy? More than likely, most statements of this sort are fantasies or dreams. Dreaming is fine, but looking forward to a bright future is not goal-setting. As you begin to formulate your goals, ask yourself three basic questions:

1. Can I break down my general goals into specific objectives?

2. What must I do to realize these specific objectives?

3. Is this a short-term or a long-term goal? I provide a place in Figure 1-1 for you to list your goals. Consider the following examples. Suppose that your goal is to

- Retire with financial security. What does security mean to you? Does it mean that you stay in the home that you have lived in for 30 years? Or does it mean that you can sell that big, old house and move to a luxury condo in Boca Raton? Do you want to retire at 60, 65, or 75? How much money will you need to save every year in order to retire at the time and to the place you prefer? What are your savings options, for example a 401(k) plan?

- Start your own business. Do you want to start an independent business or buy a franchise? Can you work out of your home, or do you need to purchase or build a site? How will you pay your bills until the business shows a profit? Can you get a loan from the Small Business

Administration? How much money will you need in order to purchase and establish the business (acquire the site, buy inventory, hire personnel, purchase insurance, and so on)?

- Put your child through college. Do you want to send your child to a state school, or do you want him or her to have the option of attending a more expensive, private college? Will you be able to take advantage of student loan or grant programs? How old is your child? How much money will you need to save each year until he or she graduates from high school? Can you take advantage of college savings plans to help you save the money?

- Buy a home. When do you want to move into a new home? How much do you want to borrow? How much money do you want to put down on your home? Do you want to put at least 20% down to avoid paying for a mortgage insurance policy?