Investing in the stock market is an admirable objective. These are the 3 things you need to do to prepare yourself financially for investing.
I was on Status Money the other day and a question arose. One user asked, “How do I start investing in the stock market”. The user has given information as if he were 25 years old, he has debts over which he is ahead. They currently contribute a significant percentage of revenue to its 401K, and they know the market a bit.
Some people gave them advice that basically boiled down to “Use my Robinhood link”.
I decided to take a closer look and congratulated the user for thinking of investing at such a young age. Whatever your age, it’s better to invest than not to do so, because your money will lose value over time with inflation if you leave it in the bank.
I wanted to know more about the person’s finances in order to make more informed suggestions. I started asking questions; I wanted to know the person’s financial situation and I didn’t want to just give a canned answer.
I asked him (I’ll assume the user is male for the purposes of this blog) what type of debt does he have (credit card debt, student loans, etc.) and what is the employer for the 401K.
He mentioned that he invests 12% of his income in the 401K of his work! His business has a 50% match up to $ 17,000. He also says that he has the usual debt: credit card, student loans, car ticket, personal loans and mortgage as soon as he closes the house he buys.
I gave her some tips that I would like to share with you today.
Your money will lose value over time with inflation if you leave it in the bank.
I like to echo Dave Ramsey on occasion by giving my opinion on personal finances. I am a follower of Dave Ramsey’s 7 Steps to Financial Freedom and I like to recommend that others, especially people with consumer debt, do the same. I prefer to focus on the first three steps because most people have a hard time starting their journey to financial freedom.
The emergency fund is important because it saves you from having to use a credit card in case of unexpected expenses. Research shows that 40% of Americans cannot handle an unexpected expense of $ 400 without using a credit card.
The creation of an emergency fund is the first step for a very critical reason. If you try to skip this step and go directly to step 2, you risk continuing to use your credit card in the event of unexpected expenses.
An emergency fund offers you a buffer between you and the unexpected. With regard to the emergency fund, the bigger the better, but you should start funding it with as much as $ 1,000.
40% of Americans cannot handle an unexpected expense of $ 400 without using a credit card.
Debt repayment is a form of investment that guarantees you a return in the form of interest that you no longer pay to the debt holder. So if you have a credit card that has an annual percentage rate of 16% and you pay for it, it’s like getting a guaranteed return on investment of 16%!
Stage 2 focuses mainly on consumer debt (such as credit cards, car notes and store cards). Ramsey recommends focusing on mortgage repayment in the later stages. I would not include student loan debt at this stage, especially considering that student loan debt for many people is five figures for some of us, even six figures.
There are two keys to success in step two. The first is to stop using your credit cards. The second is to use the debt snowball to pay off your debts. Yes, the debt avalanche saves you more money in the long run by paying off the higher interest rate debt first. But the debt snowball is easier to stick to, because you can see your smaller debts paid off early, which helps consumers convince themselves that they can get out of debt.
Debt Snowball allows you to organize your debts from the lowest balance to the highest balance. You pay the minimum payment on all debts except the one with the lowest balance.
You take all your available funds and pay the lowest balance as quickly as possible.
Once the original lowest balance is paid off, take that money you paid for the first debt and add it to the minimum payment for the next lowest balance. Now use this new higher payment to pay off the second debt.
You must repeat this process until you have paid all of your consumer debt. This payment method allows you to get quick wins and create momentum to pay off your debt.
The debt snowball is easier to stick to because you can see your smaller debts paid off early, which helps consumers gain confidence that they can get out of debt.
You may think that after you’ve created your emergency fund and paid off all of your consumer debt, you’re ready to start investing. I do not recommend this. What happens if you experience a financial setback greater than $ 1,000? This is why it is important that you go through each step of the baby to protect yourself and your finances.
Your third step is to save 3 to 6 months of income to fully fund your emergency fund. What you can do is take all the money you asked for in step 2 and apply it in step 3. This will give you at least 3 months of your income set aside in the event of an event. major of life like losing a job.
You will want to do some personal finance cleaning before you start investing in the stock market. It is in your best interest to eliminate all consumer debt before investing in anything. You will also want to start your emergency fund and finance it entirely with 3 to 6 months of income before investing. In this way, you will be properly isolated from unhappy life situations.