You might not be ready to invest.

So much of the content I see in the personal finance world is about investing and the distinction between a traditional IRA, a Roth IRA, a 401k and other retirement investment vehicles (if you’re not familiar with these that is perfectly okay!). Not only can this information feel overwhelming, but a lot of people are simply not ready to invest. Before you’re ready to invest in a retirement account, there are some very important foundational steps to consider. Give yourself grace to learn the basics first, and then build on your foundation to learn about investing and investment vehicles later. Having a solid foundation to build from will only help you when you are ready to invest later.

Investing for retirement is a tremendously important component of financial planning and one of the hardest for people to do. It is hard to set aside money for a time that is 10, 20, or 30 years away when expenses today are more pressing. The real incredible growth in investing happens when an investment has time to compound. For this reason, the common advice is to start investing as soon as you can, even if it’s just a little bit of money.

But here are four reasons you might not be ready to invest and why you should wait until you are:

1.     You don’t know how much money comes in or goes out each month. To effectively set aside money for retirement, you want to be sure that you can cover everyday expenses. Without knowing your inflow or outgo, or simply not having a good pulse on your money, you are not ready to be setting some aside in an (almost) untouchable account (I’ll talk about this more later).

2.     You have consumer debt. Consumer debt is any debt that is used to maintain a lifestyle and is not for an asset (think, your home). This includes credit cards, cars, cell phones, student loans, and the list goes on. When we have consumer debt, we are spending, with interest, to keep that debt around. Depending on the interest rate of your debt, you would be losing money to invest rather than pay off your debt.

3.     You have an undefined emergency savings account. If you look back at your savings account over the last six months (or year), has the amount decreased? Did you take a little from it to cover your bills? This is a great way to see if your spending is under control. Generally, this savings account should stay pretty consistent. The number should not fluctuate and should really just go up with earned interest on the account (maybe a dollar or two a month). If your savings account is not set with clear boundaries, for example, it can only be used for a medical emergency, a car emergency, a house/structural emergency, you are not ready to be setting some money aside in an (almost) untouchable account.

4.     You don’t have a good risk mitigation plan. Whew, this sounds serious. By risk mitigation plan, I mean: you know what your health insurance covers and does not, what your deductible and copays are, how much you would be on the hook for in the even of some injury, and you have this set aside; you have the same information for your car insurance, home, and business (if applicable); you have term life insurance for yourself and your spouse (if you’re married). The amounts not covered by insurance might be what you define as boundaries for your emergency savings account (see 3 above).

Why are all of these foundational steps so important? Every year, people draw money from their 401k or other retirement investment account to cover unpredicted expenses. These withdrawals cost people exorbitant amounts of money in penalties, upwards of $7B. If you withdraw money from a retirement account before you reach 59 ½ years of age, you could be charged penalties, taxes, and you could lose out on future growth of that money you stocked away to allow to compound.

One study shows that 60% of households report having an unplanned financial shock (unpredicted expected). If you can create a financial plan that helps you plan for expenses (make those unpredictable ones predictable), you will be in a better position to begin investing for the long haul.

Start by creating a budget and tracking your expenses. Get familiar with where your money is going. Make a plan to pay off debt. If you have a savings account, decide exactly what boundaries you want to set around using that money. Review your risk mitigation plan – know what’s contained in your insurance policies and make sure you have coverage that won’t leave you unprepared or holding the bag.