Some folks know I am a small time stock investor. Very small time… But a reader send me an email (thanks SJ) to questions@marknoldy.com. The reader asks, “How did you (me) know when it was time to invest in individual stocks?”

Disclaimer: I am not a financial advisor, and this is not advice. This is for educational purposes only. So do your own due diligence. I am just sharing what I have done and why. I absolutely did not invest in the stock market until the following four things were in place…

1. The Four Walls

Although I have always studied company fundamentals, I did not invest a single dollar that I needed to sustain the four walls. I’m referring to food, shelter (including utilities), clothing, and transportation. I absolutely did not invest in the stock market while I was establishing these basic needs. And I waited until I was able to do this month after month for a sustained period of time before moving on to my debt snowball.

2. Debt-free

Once all four walls were in place, we focused on paying off high-credit consumer debt that was inherited in our divorces 14-20 years ago. Although the stock market has averaged 8% to 12% (depending on who you believe), we made sure to pay off credit cards that were charging us 16% to 24% before jumping into any investments. Period.

Credit cards are a part of our financial plan, but we never carry a balance

3. Emergency Fund

After the fours walls were up, and our consumer debt was vanquished, we focused on building a full emergency fund. Having this rainy day fund in place gave us security and room to breathe. We were no longer worried about surprises. (Dave Ramsey calls them Murphy.)

It’s funny, but it seems like we have fewer emergencies with an emergency fund. Surprises became an inconvenience rather than a catastrophic financial event.

The Vanguard Federal Money Market Fund (VMFXX) is the resting place of our emergency fund. Safe and out of the way of temptation, yet easy enough to transfer into our local checking account if needed. Also the rate is a little better than at our local bank, but this placement is mainly for the extra step (i.e., extra thinking) it requires to use the money.

4. Retirement Investing

After the four walls were in place, we were debt-free (except our mortgage), and our emergency fund was funded, we then focused on tax-favored retirement investments.

In addition to my the forced retirement contribution of 7.5% for my teacher’s pension, I had initially started a 403(b). However, I stopped funding that, because my employer does not match. So now, I have my pension and a Roth IRA at Vanguard.

My spouse’s employer does offer a match on her 403(b), so she maxes that out. And she also has a Roth IRA at Vanguard. Vanguard accounts are more or less a “set it and forget it” undertaking. We chose our three funds and the proportions for each from our automatic weekly contributions.

(VTSAX-64%, VTIAX-16%, and VBTLX-20% if you’re curious. Read The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk). And check out my post on asset allocation.

So we’re both investing about 15% for retirement into tax-sheltered investments.

Money to Burn

After the four walls, becoming debt free, establishing an emergency fund, and setting our retirement plan in motion, we reluctantly decided to dip our toe in the water with stock investing at Scottrade, which subsequently became TDAmeritrade. Now we use M1 Finance.

Do not invest money that you cannot afford to lose! (At least temporary…)

The typical neophyte investor gets in the market when prices are high due to fear of missing out on big gains. Inevitably, there is a downturn. The neophyte investor panics and sells, cementing his losses. So in stead of “buy low, sell high,” many would-be investors do the exact opposite.

When the market dips, keep investing! Stocks are “on sale” when the market is correcting. It’s kinda like stocking up on tennis balls or soft drink when it is on sale at Wally World. Investing through this thick and thin is called dollar-cost averaging. Mathematically, it is the best way to maximize returns in the long-run without trying to “time the market.” That’s statistically impossible.

Roller-coasters

The most fun rode at the amusement park is not so fun for the faint f heart in the stock market’s erratic short run. It is driven largely by investor psychology on any given day. Therefore, I expect up and down swings. In the short-term, the stock mark is a crazy roller-coaster ride. So strap yourself in and hang on tight if this is something you want to do.

In the words of Warren Buffett: When others are greedy, be fearful. When other are fearful, be greedy.

What about Paying-off the Mortgage Early?

Although Dave recommends a 15-year fixed rate mortgage, we recently re-financed into a low 30-year fixed rate. The rate is very low, and we may pay extra when we have “extra paycheck” months. But in nine years, we will still be paying our 2030 mortgage payments with 2020 dollars. What I’ve learned is that a mortgage is a great inflation hedge. And we’re optimizing cash flow in the present.

As always…

Thank you for reading. This post was a little longer, and it echoes many of Dave Ramsey’s principles, plus a few of our own. If you have a personal finance question, send it to questions@marknoldy.com.

Have a great weekend!