The Motley Fool has been helping ordinary people become better investors for nearly two decades. This month, we’re reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence. During the last few weeks, we’ve looked at several different aspects of investing, ranging from making your cash work harder for you to getting acquainted with some of the stocks and funds that give you lucrative opportunities to profit in the long run. Yet when you take a step back from all those specific investments, you need a unified financial…
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The Motley Fool has been helping ordinary people become better investors for nearly two decades.
This month, we’re reaching out to millions of investors to help guide them in their quest toward financial knowledge and independence.
During the last few weeks, we’ve looked at several different aspects of investing, ranging from making your cash work harder for you to getting acquainted with some of the stocks and funds that give you lucrative opportunities to profit in the long run.
Yet when you take a step back from all those specific investments, you need a unified financial strategy to guide you in choosing among them and allocating your money appropriately. Although experienced investors often follow complex strategies, starting out simple is always helpful. So with that in mind, here’s a four-step plan you can follow to get your finances in order and get on the road to prosperity and financial security.
Step 1: Get out of the red.
Lots of beginning investors often want to dive into stocks right away. But if you’ve got balances on high-interest credit cards or other costly debt, use most of your spare cash to get it paid down.
Granted, there are occasions when it would be smarter to invest than to pay off debt. But usually, you’ll end up better off saving yourself interest charges of 15% to 20% or more.
Step 2: Build a cash cushion.
Even once you’re out of debt, you want to make sure you stay that way. Having an emergency fund to cover unexpected expenses is a big step toward protecting yourself from a financial catastrophe that can undo all your progress in fighting your debt. Most experts advise three to six months’ worth of expenses to help you weather a layoff, but even having just a few hundred dollars can prevent you from having to go back into debt to cover a car repair or a broken water pipe.
Step 3: Build a core portfolio.
Some investors feel comfortable starting with individual stocks and never look back. But for most beginners, funds and ETFs are an easier, less scary place to start.
In particular, low-cost index funds and ETFs make it simple to get broad market exposure in a variety of different types of investments. Target retirement funds even combine different investments in a single fund, automatically changing their allocation among stocks, bonds, and cash as you get older to make their overall portfolio more conservative. Whether you go that route or choose to build your own mix of funds and ETFs, following simple asset allocation methods to build a core portfolio is a great way to start.
Step 4: Pepper in some stock picks.
Once you have core holdings established, it’s easier to take the greater risk of making specialised investment plays. You may pick individual stocks, or you might prefer to use sector ETFs or other niche investments to capture returns from a group of stocks. As you gain confidence, you can devote more of your money toward this part of your portfolio, leaving your core untouched to grow more conservatively.
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The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
A version of this article, written by Dan Caplinger, originally appeared on fool.com