Note: I think of the financial walk of shame as when you prematurely invest your money only to need to sell off your investments for the extra cash.

Maybe you heard about a “can’t miss” investment from a friend or you wanted to get a head start by investing early.

Luckily, there’s a few ways to avoid this.

The number one cause of the walk of shame is not establishing an emergency fund.

An emergency fund is just a savings account where you keep 6–12 months of your living expenses.

For some this may be $7,000 and for others it may be $30,000 — the important part is having one.

Why is having an emergency fund important?

You would not believe the peace of mind you get once you know that you can live for several months without getting a paycheck.

Those inconvenient problems that come up in life that require money to fix aren’t so stressful anymore.

Also it opens you up to a new world of things to do with your money, like investing.

While there’s no one-size-fits-all financial advice, I’m a strong believer that you need to ‘earn’ the right to invest - a concept I first heard coined by Douglas Boneparth.

Earning the right to invest means that you should have your financial foundations taken care of first, like understanding cash flow and establishing savings habits for example.

If you’re living paycheck to paycheck, there’s many things that I believe need addressed before sending money to investments.

Selling off investments because you need the cash can impact you in a few different ways:

You may have to pay more in taxes when selling because a proper selling strategy wasn’t established

If you sell a stock that you’ve held for less than a year, you’ll incur short term capital gains tax.

Short term capital gains tax means that if you earned a profit, you owe taxes on that dollar amount at your ordinary income tax rate.

For example, if you sold a stock you owned less than a year and had $100 in profit and you’re in the 22% tax bracket — you would owe approximately $22 in short term capital gains taxes.

(There’s many strategies around when to sell and which stocks to sell to offset capital gains but for simplicity, I’ll leave it there)

You may start to develop a negative view towards the stock market

With recent stock market events such as GameStop and AMC, many people are rushing into the stock market trying to make quick money.

And that’s not a bad thing.

But it needs to be viewed as what it is.

It’s trading, not investing.

You need to determine if you’re investing for retirement or trading for income when entering the market.

You can hop on trends and have a good chance of making some money.

But without knowing when to sell and how to make decisions after you’ve accumulated some success, it can be wiped away quick.

Rather than viewing it as a place to let your money grow long term — you may start to see it as a savings account that might go up or down, you never really know.

You may miss out on the growth of the stock market

If you’re forced to sell off investments early, you may miss out on all the significant growth that can be experienced in the stock market.

Nobody knows when the stock market is going to go up or down, but historically it’s always trended up.

It usually pays to remain in the market through the ups and downs if you’re investing for the long term.

In fact by trying to time the market, if you miss out on just the FIVE best days of the stock market, your returns drop by 35%.

Here‘s a few ways to avoid taking the financial walk of shame.

#1 - Establish an emergency fund

Before you start saving for other goals or investing, it’s generally recommended to save money for your emergency fund.

This is typically 6 months of expenses.

After what we experienced in 2020, some may argue 12 months is more accurate.

Don’t worry if it takes some time to work your way up to 6–12 months.

As long as you’re saving consistently, you’ll get there.

This will help cover any unexpected expenses you incur and will help avoid prematurely selling investments due to lack of cash.

#2 - Develop a consistent savings plan

This ties directly into the previous step. After you’ve determined how much you need in your emergency fund, now you can begin to work backwards and figure out how much you need to save each month to reach that goal.

For example if your monthly expenses are $1,500 and you want a 6 month emergency fund, you’ll need to have $9,000 saved. If you’re able to save $1,000 month - you’ll reach your emergency fund goals in 9 months.

The important part is setting a realistic amount that you can save each month and then one way I make sure I save the appropriate amount is by automating the transfer within your banking app.

#3 - Understand why you’re investing

Before you begin investing, ask yourself why you’re entering the stock market.

Are you looking to make quick income?

Are you investing for retirement?

Having a clear understanding will help you set expectations for performance.

If you’re investing for retirement, you know that the day to day ups and downs in the markets won’t affect your long term growth. Generally when investing for retirement, you’re not going to see those weeks where everything is up 250%+ like some experienced Gamestop and others.

If you’re trading for quick income, you may need to pay more attention to the market and you also have a chance to experience big gains.

But with the opportunity for big gains, you also have the other side of the equation — big losses.

Understanding your purpose for investing will help create clarity around your decisions to buy and sell.

Prematurely selling off your investments is a tough pill to swallow. You worked up the courage to get started investing only to end back up in the same place.

A way to combat this is by having an investment strategy.

A well-planned investment strategy can be one of the most profitable things you create in your life.

Don’t wait til it’s too late (or start before it’s too early).

Have you taken the financial walk of shame before?

_{Published Feb 1, 2021}