Investing in the stock market is a big step, and it’s not good for everyone. If you get into the stock market without fully understanding how it works, it could end up being a costly mistake.
That said, investing your money is one of the best financial steps you can take to build wealth. If these four signs apply to you, you might be ready to go from saving to investing.
1. You understand the risks and rewards of investing
Investing is inherently riskier than keeping your money in a savings account. The stock market is a roller coaster of short-term ups and downs, so you can expect your investments to have good years and bad years.
However, you can also earn exponentially more money over time by investing. Even the best savings accounts offer interest rates of around 1% per year, while the stock market as a whole has historically achieved average returns of around 10% per year.
This does not necessarily mean that you will earn 10% return every year. Some years you will earn above average earnings, while other years your returns will be lower. By staying invested in the good times as in the bad times, your annual returns will be average and you will be able to make a lot of money in the stock market.
2. You have a strong emergency fund
Investing is very different from putting your money in a savings account. Withdrawing your money from the stock market has serious consequences (including penalty fees and taxes), so only invest money that you know you won’t need anytime soon.
Before you start investing, make sure you have a healthy emergency fund and enough savings to cover at least three to six months of running expenses. This way, if you are going through a rough time or face an unforeseen expense, you can still pay your bills without having to dip into your investments.
3. You have paid off a high interest rate debt
You don’t have to be debt free to start investing, and it is often wise to start investing even if you are in debt. If you wait until all of your debt is paid off before investing, you’re missing out on your most valuable resource – time.
That said, if you have high interest rate debt (like credit card debt), it’s a good idea to pay it off before you put any money on the market. High interest rate debt can be incredibly expensive, and the longer it takes to pay it off, the more it will cost you. In some cases, you could end up paying more interest on your debt than what you earn from your investments.
4. You have taken into account your investment preferences
There are countless investments to choose from, and there is no “one size fits all” strategy that is right for everyone. Which approach is best for you will depend on your preferences.
If you like to research and want to delve into the finer details of different companies, buying individual stocks may be the right option for you. On the other hand, if you prefer a low-maintenance, low-effort approach, investing in index funds or contributing regularly to your 401 (k) or IRA may be a better choice.
There is no right or wrong answer here, but knowing your investing style is important. If you choose a strategy that does not match your preferences, it will be more difficult to continue to invest consistently, which will limit your earning potential.
Investing in the stock market is a smart move that can increase your net worth, but it’s crucial to make sure you’re ready before you get started. Once you’re ready to invest, you’ll be on your way to supercharging Your savings.