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What You Need to Do Before You Invest Through Robin Hood, Acorns, or Stash

Cash Flow and Budgeting Investments

To build a great pizza, you should always put it together in a certain order. You may disagree, but the crust should always go on the bottom, then sauce, next comes the cheese and finally toppings. If you were to flip the order and put the toppings first and the crust last, it may still be a pizza, but it’ll be messy and it certainly wouldn’t taste as great.

The same goes for your finances. To build a great financial future, you should build it in a certain order, or it might not turn out as great as you’d hoped.

Investing apps like Robin Hood, Acorns, or Stash are all very popular and their use is on the rise. Always at your fingertip experience and low cost investment trading have contributed to skyrocketing popularity. As of March 2018, Robin Hood, Acorns, and Stash had over 8 million users combined. Robin Hood alone increased it’s users to 6 million by the end of 2018.

Investing apps are fun and easy to use. It’s tempting to sign-up and start investing. But just because everyone else is doing it, doesn’t mean it’s right for you. Like toppings on a pizza, investing your hard-earned money in a volatile investment like the stock market should come last. You don’t want to get things out of order, or things might turn out a little messy.

Push pause on investing apps until you’ve complete these four financial steps -

Build a Budget

It’s not very fun, but it’s necessary. With a budget you can know how much money you have at the beginning of the month to spend on necessities and how money you have at the end of the month to sock away in savings. You could use a free spreadsheet (just Google “free budgeting spreadsheets”), but budgeting will be easier if you use a good app, some of which you can find for free free. Some examples are Mint, Every Dollar, and PocketGuard. If you do end up using an app, avoid letting the app do all the work for you. If you’ve spent $400 on Mountain Dew and Taco Bell this month, it needs to hit you hard so you can make a change. Don’t get into the trap of letting everything run automatically. Manually enter your purchases and income so you can see it, feel it, and adjust accordingly.

Save an Emergency Fund

Now that you know how much you have spent each month, and you know how much you haven’t spent or won’t spend, you can put your savings towards an emergency fund. Generally speaking, 3 to 6 months of monthly expenses in the bank is adequate. If your income varies from month to month, if it will be difficult to get a replacement job if you lose your current one, or if you would feel more comfortable with more in the bank, aim for 6 months.  Have a system set up to move money from your checking account to a designated emergency fund savings account each month until you hit your target.

Pay Off Debt

Consumer debt such as credit card debt, car loans, student loans, or medical debt are a real drag on your monthly finances. In addition, high interest rates or long payment periods make it feel nearly impossible to pay them off. However, you should feel motivated to get rid of debt because it exposes you to extra financial risk. If you have a reduction in income from job loss or pay decreases, you can cut Starbucks, eating out, and other entertainment costs, but your debt-holders still want their cut of your income every month and will do everything they can to get it.

Pay off your debt by using the “debt snowball” method. Make your smallest monthly payments on all your debt, but any extra savings goes towards paying off your smallest debt. Once that smallest debt is paid, then apply what you were paying on the smallest debt toward your next-smallest debt. You’ll gain momentum and build your monthly payment amount until you knock out all of your consumer debt. In a short time, all the debt will be gone, and you will have freed up a significant amount of monthly cash inflow for saving and investing.

Get the Employer Match

Once you have a budget, have an emergency fund, and you’ve paid off all your consumer debts; start saving through your employer-provided retirement plan. Talk to HR and ask if there is an employer match at your workplace.  If your employer does offer a match, take advantage of that free money and work toward getting the full match. Either elect to defer from your paycheck to get the whole match right away, or gradually increase your deferral percentage until you are able to get the whole match.

Choose Your Toppings

If you’ve completed the above 4 steps, it’s time for toppings. There are tons of toppings out there, so you’re going to have to pick and choose what you think will be best for you. What’s best for you could be Robin Hood, Acorns, or Stash. What’s best for you could be a brokerage account, an IRA, or a Roth IRA. What’s best for you could be stocks, bonds, mutual funds, or a mix of all of them. The toppings you choose all depend on your situation and your goals.

Decide what you want to do then research your options. If it becomes overwhelming, find a trusted financial advisor that can help you wade through your options. An advisor has experience and knowledge and can help you ask questions you didn’t know you needed to ask and make informed decisions you didn’t know you needed to make. You don’t need to invest with that advisor to get the benefit of taking their advice, so don’t be afraid to look for help. It’ll save you time and maybe even some money.

Remember, you can become financially confident and you can have a better investment experience.

- Tim Bacus

P.S. enjoy your pizza.