A Beginner’s Guide to Investing (Part 2): Three Things to Do Before You Buy Your First Investment

In Part 1, we looked at what investing is and why it matters.

Many beginners ask, “What should I invest in?”

That’s an important question, but there are a few things you should do before buying your first investment. Building a strong financial foundation can save you from costly mistakes later.

1. Build an Emergency Fund

Life does not always go according to plan. Unexpected expenses, such as a major home repair, medical expense, or a period without income, can happen at any time.

An emergency fund is money you set aside only for unexpected expenses or financial emergencies. It lets you pay for these expenses using your own savings instead of relying on high-interest credit cards, selling your investments at the wrong time, or borrowing money.

How Much Do You Need?

An emergency fund is usually calculated based on your essential monthly living expenses. This includes necessities like rent or mortgage payments, groceries, utilities, insurance, transportation, internet, and phone bills.

A good rule of thumb is to save enough to cover 3 to 9 months of these essential expenses. The right amount depends on your household and your job situation:

• 3 months if your household has two stable incomes.
• 6 months if your household relies on one income.
• 6 to 9 months if your income is irregular, such as freelance, contract, commission-based, or seasonal work.

For example, if your household’s essential monthly expenses are $4,000 and your goal is to keep 3 months of expenses on hand, you may aim to save approximately $12,000.

I have covered emergency funds in more detail in my article, Understanding Emergency Funds.

2. Pay Off High-Interest Debt

If you have credit card debt, you’re probably paying interest of 20% to 30% a year. That’s much higher than the interest you are likely to earn from your investments. Therefore, it usually makes sense to pay off your credit card and other high-interest debt before you start investing.

3. Understand Your Goals and Timeline

Before choosing any investment, it is important to understand why you are investing and when you will need the money.

Your goals and timeline help determine not only what you invest in, but also where you invest it.

For example, in Canada, there are different accounts designed for different purposes, such as the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA), Registered Education Savings Plan (RESP), and Registered Retirement Income Fund (RRIF).

These accounts have different rules and tax benefits. Choosing the right account can help you make the most of your savings.

What’s Next?

Once you have built your emergency fund, paid off your high-interest debt, and set your personal goals, your financial foundation is solid. You won’t be forced to sell your investments in a panic when something unexpected happens.

Now, you are ready for the fun part: deciding where to put your money.

In “Part 3: The Investment Menu — Understanding GICs, Bonds, Stocks, and ETFs,” we will break down the most common types of investments available to Canadians, how they work, and how to choose the right options for your specific timeline.

Read Next: Part 3: The Investment Menu — GICs, Bonds, Stocks, and ETFs (Coming Soon)

Disclaimer: This article is for educational purposes only and is not financial or tax advice. Please consult a qualified tax or financial professional before making any decisions.