I love that so many people are curious about investing. The world of investing can be overwhelming for beginners – stocks, bonds, mutual funds, ETFs, annuities and the list goes on. Investing is the key to truly building wealth. I want you to get started as soon as possible.
A statement that I get often is “how do I invest in stocks.” Before I answer that question, I always like to cover the basics which we’ll go over in this post.
Pay off High-Interest Debt
The first thing you need to do prior to investing is to pay off high-interest debt. By high-interest debt, I mean personal loans, credit cards, payday loans and maybe even your auto loan. Although there is no definition of what interest rate is considered “high-interest”, you should want to pay off anything over 8% as soon as possible.
For example, say you have $1000 on two different credit cards. One with an interest rate of 4% and another with an interest rate of 19%.
- $1000 with 4% interest rate = $40 in interest in 1 year
- $1000 with 19% interest rate = $190 in interest in 1 year
Do you need to be completely debt free prior to investing? No! However, you should pay off your high-interest debt asap. You’re high-interest debt may be costing you hundreds or even of thousands of dollars annually in interest! T
Think of it this way, if your goal is to invest and make money, you need to make a higher percentage on your investments then you’re paying on your debt. The average annual return since inception of the S&P500 is 10%. Although that’s the average annual return, that number is quite misleading. Most financial advisors would say that an 8% average annual return would be good. Therefore, if the interest rate on your debt is higher than 8% than it’s not likely you’ll make more money on your investments then you’re being charged in interest.
If you do have high-interest debt, have you considered doing a balance transfer to a credit card with an introductory period of 0% interest? Balance transfers can help you avoid the additional interest charges in an effort to pay off debt fast. The key to qualifying for the best balance transfer offers is to have a good credit score.
After you have paid off your high-interest debt, you should fully fund your emergency fund. An emergency fund is 3-6 months saved in case of a financial emergency. Financial emergencies include immediate home or car repairs and job layoffs among other things. Having an emergency fund can save you from resorting to high-interest debt in order to cover financial emergencies.
An emergency fund can be a lot to save and very overwhelming. First start by saving $1000. You can use these 10 unique ways to save $250 this month to jump-start your saving. In addition, automating your saving can literally making it effortless. You can automate your saving directly
In addition, automating your saving can literally making it effortless. They money will be out of sight and out of mind, therefore you won’t be tempted to use the money for a non-emergency. You can automate your saving directly through your payroll by having part of your paycheck go to a different bank account. Or you can set-up money to automatically be transferred from your checking account into your saving account.
Start with your 401k
Many people don’t realize that your 401k (or employer-sponsored retirement plan) is your first chance at investing. Most 401k’s are invested in mutual funds. A mutual fund is a collection of stocks and bonds.
Does your job offer a 401k? If they do offer a 401k, do they match your contributions? If your job matches your 401k contributions, at a minimum you should be contributing up to the match. That way you aren’t missing out on any free money.
- For example, say you make $50,000 and your job matches 3% of your annual salary. That means if over the course of the year, you put $1500 into your 401k, then your job will also put $1500 into your 401k. Therefore, you would’ve received a free $1500!
Traditional 401k accounts involved pre-tax money. That means the money is deposited into your 401k account prior to taxes being taken out of your account. It helps to lower your income that is taxed also. Since the money goes right into your 401k before you even see it, you won’t feel like you are “losing” money.
Now that you have paid off all high-interest debt and funded your emergency fund, it is time to start investing. I am not saying that you have to be completely debt free before you start investing; however, it is important to look at the price (i.e. interest) that you are paying on the money you have borrowed (i.e. student loans, car loans, credit cards, etc…) versus that amount of money that you will actually make off your investments.
There are so any options when it comes to investing! If you are looking to get your feet wet in investing, check out these 3 apps that help you invest with as little as $5.
Do You Have Any Tips for Millennials Looking To Invest? What Should They Do Prior To Investing?
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