Here’s how to know if the time is right to kick off your investing career.
- Investing money is a great way to grow wealth over time.
- It’s important to tackle certain financial priorities before investing in a brokerage account.
If you have money you do not plan to spend right away, you may be considering opening a brokerage account and investing it. And that’s not an unwise decision.
Investing is a great way to grow your money into a larger sum over time. And the sooner you start doing it, the more wealth you might accumulate in your lifetime.
But it’s also important to check certain financial tasks off your to-do list before you start investing. And that means you should only invest if you meet the following criteria.
1. You have a solid emergency fund
While building wealth for the future is a great thing to do, it’s more important to protect yourself financially for the present. And that means having a fully loaded emergency fund – enough money in your savings account to cover at least three months’ worth of living expenses.
In fact, in the wake of both the pandemic and rampant inflation, some financial experts are calling on savers to sock away a lot more than three months’ worth of living costs. Suze Orman, for example, says that having up to a year’s worth of expenses in savings is a smart bet.
Either way, before you start investing, make sure you’re happy with the state of your emergency savings. And if not, filter some more cash into your bank account before investing it.
2. You have no high-interest debt
If you load up on stocks in your brokerage account, your portfolio might deliver a good 10% return each year. That’s in line with the S&P 500 index’s historical average, and that index is generally considered to represent the stock market as a whole.
But if you’re carrying a balance on your credit cards, you might be paying interest to the tune of 16% or 20% a year. That’s more than what you stand to gain by investing. And so a better bet is to take your spare cash and use it to knock out your unhealthy debt before you start buying stocks.
3. You have a plan
It’s important to establish an investment strategy before diving in. First, figure out what your horizon looks like. Are you investing for the next 10 years? 20 years? 30 years?
Next, figure out what your risk tolerance is. Would you lose sleep or be tempted to dump stocks in a panic if your portfolio were to drop 10% or 15% overnight? If so, then you may not want to invest solely in stocks.
Finally, you’ll need to decide if you’re willing to do the legwork to research stocks individually, or if you’d rather fall back on index funds, which do not require that same level of work. We just talked about the S&P 500 index as a measure of the stock market’s performance. Well, index funds are set up to simply match the performance of indexes like the S&P 500, so they’re a really easy option for newer investors to jump on.
Investing money is a smart move – but only once your financial house is in order. Before you start pumping cash into a brokerage account, make sure your emergency fund is set, you do not have costly debt, and you have a game plan for making the most of your money.
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