You’ve probably heard that investing in the stock market is one of the best ways to build wealth.
Yet, millennials are holding more cash than prior generations, despite the past decade of unprecedented stock market growth. Among the many reasons for this: millennials feel unprepared to invest, don’t know where to start investing, or are worried about an eventual crash. It’s easy to understand why millennials feel this way. Many graduated college around the greatest stock market crash since the Great Depression and faced a weak job market.
Yet despite feeling unprepared to invest, millennials are concerned about their financial future. And, while some say cash is king, investing is a key part of a strong financial plan.
About now you may be wondering how to begin investing in the stock market. You can start anytime, but first, it’s a wise idea to tackle other financial obligations before diving into investing. To help you prepare to invest for your future, here are 6 things you should do first.
1. Have an emergency fund
Life happens. Unexpected expenses crop up all the time. If you can’t cover a surprise flat tire or vet visit for Fido with cash, you probably should hold off on investing in the stock market.
Here’s a pro tip: save at least $500 in an emergency fund before investing. Even just a small, starter fund will allow you to cover expenses without going into debt or having to liquidate your investments. To make sure you have sufficient funds to cover potentially larger emergencies, experts recommend that you save three to six months of expenses.
2. Eliminate high-interest debt
Paying down high-interest debt is a guaranteed return on your money. Every dollar you put towards debt is a reduction in interest payments you would have owed to creditors. For example, if you do the math, paying off $200 of credit card debt with 18% interest will save you just under $40 in interest.
Comparatively, the long-term return on the S&P 500 is only around 7%. So if you invested that $200, you would only earn $14 in an average year. Paying down your high-interest debt and saving $40 has a greater impact on your wealth.
As you can see, it’s important to get rid of high-cost debt as quickly as possible. Once you’ve done this, you can now free up cash to invest.
3. Protect yourself and your family
An emergency fund is a great way to cover unexpected expenses. But, what would happen if you could no longer work? Or if you passed away, leaving your young family with oodles of bills to pay?
This is where term life insurance comes in. Term life insurance is generally affordable and will help you cover your family’s needs and replace your income – in the worst case scenario. Term life insurance offers coverage for your family or dependents if you pass away in a certain time period, known as the term. This type of insurance can often be purchased in 5 to 30 year periods, depending on your needs.
We recommend shopping around for the best prices on term life insurance. While you’re at it, it’s also a good idea to sign up for long-term disability insurance through your employer – if this is an option for you. Why? Because if you become disabled, long-term disability insurance will help replace your income while you are recovering.
4. Know your goals
Are you investing for retirement? A child’s college expenses? Your dream home? Indeed, understanding why you are investing will help drive how you invest.
Spend some time thinking about what you want to achieve and what your timeline is to reach your goals. From there, identify your priorities and what sacrifices you’re willing to make to get there. For example, if you decide to invest $100 a month, that money may have to come from somewhere else in your budget.
Talking about budgeting, it’s key that you have a budget as this will help you free up money for your goals. By using a budget, you’ll have a clearer picture of where your money is really going and you can therefore align your spending with your priorities.
5. Understand your investment options
Never invest in something you do not understand. While you don’t have to spend years studying stocks, it’s important to know the basics and get comfortable with the lingo. Educating yourself is an essential step you should take before investing a dime in the stock market.
For instance, you should know a bit about stocks, bonds, ETFs, and mutual funds. It’s also key to know about any fees involved in investment options, as well as the tax perks and implications.
Invest responsibly for your future
By taking the 6 steps above, you’ll give yourself the best chance at financial success. Not only that, but you’ll prepare yourself to invest in the stock market.
Some sage advice: take care of your day-to-day finances, know your goals, and stick to your savings plan. From there, you’ll be ready to invest in your future self.
Are you ready to get started?