The Importance of a Plan

Before attempting to invest successfully, an individual must first consider a number of preliminary requirements. According to John D. Bogle, founder of the Vanguard group and advocate of long-term investing, the first step is to switch from a paycheck mentality to a net worth mentality. This consists of planning one’s financial future long-term as opposed to thinking only about every other month, or every paycheck. Without a plan, the future is uncertain and unlikely to hold success. A plan allows one to understand what decisions to make, simplifying the wealth-growing process.

The next step is to pay off high-interest debt, particularly credit card debt, for this tends to accumulate quite quickly when left unmonitored. For example, if an individual has accumulated 5,000 dollars on a particular credit card with 20% interest, this balance will reach nearly 6500 in one year. If one decides to invest before first paying off debt, the debt will most likely accumulate at a faster rate than the growth in the market, according to past historical data. If another individual were to first pay off this debt with all their money intended for investing, they would actually win in the long-run, despite the urge to begin investing as early as possible. 

The last step is to establish an emergency fund, and it is generally advised to create a fund that covers 3-6 months of potential expenses. This will ensure that one begins investing smoothly without the possibility of major events de-railing careful, methodical planning. In order to illustrate the importance of an emergency fund, an example is necessary. If an individual paid off their high-interest debt and began investing, but suddenly injured themselves, they would be forced to pay medical bills. This distraction would likely cause them to pay less attention to investing, hindering their ability to grow wealth. Another individual that created an emergency fund would have been able to easily move past this situation, psychologically unaffected, increasing their wealth. 

Additionally, there are numerous other factors to consider before investing. One such factor is risk tolerance, an indicator that will greatly impact what one invests in, or one’s asset allocation, a topic discussed in depth later. There are a variety of measures for risk tolerance, such as age, marital status, income, and personal preferences. An individual with a low risk tolerance will likely be more inclined to heavily invest in conservative assets, such as bonds or mutual funds; an individual with a high tolerance may be drawn towards investing in individual stocks or even cryptocurrency. As each individual is different in some way, it is crucial to evaluate one's risk tolerance, for there is no one way to invest that fits all.