Do This Before Investing in Stocks

Stock investments can help you build your wealth, so you want to jump into the stock market as soon as possible. But are you really ready for that?

You should never try to build something on a shaky foundation. So, if you haven’t achieved financial stability just yet, you shouldn’t be focusing on dabbling in the stock market. You should focus on crossing these financial goals off your to-do list first.

1. Build an Emergency Fund:

An emergency fund can help you manage urgent, unplanned expenses without disrupting your budget, so you can still cover your essentials like mortgage payments, utility bills and insurance premiums as normal. Without an emergency fund, you are risking financial insecurity.

How so? If an urgent, unplanned expense crops up, you might not be able to pay for it with your savings. You might have to dip into your checking account. Dipping into your checking account could impact your ability to cover your routine expenses. You might not have enough to pay bills on time, which means you’ll be charged a series of late penalties. Or you might accidentally put your checking account into overdraft and acquire a slew of overdraft fees. Without this safety net, you could deal with a domino effect of financial problems that will be challenging to recover from.

If you don’t have an emergency fund, you can avoid this checking account problem by borrowing funds to cover the urgent expense. Go to the website CreditFresh and see whether you’re eligible to apply for an online loan there. You just might meet all of the requirements. As long as you’re eligible, you can fill out an application and quickly learn about your approval status. If you happen to get approved, you can use the online loan to resolve an urgent, unplanned expense in a short amount of time. Then, you can commit to a straightforward repayment plan.

What if you used stock investments for an emergency fund?

Stock investments are not effective replacements for emergency funds. First, because stock investments aren’t as reliable as savings—you can’t be sure if the stock will go up or down in value by the time you have an emergency. So, you might not have enough to cover the costs. Second, stock investments aren’t liquid. You’ll have to go through the process of trading/selling them in order to access their cash value. You won’t be able to make a withdrawal at a moment’s notice.

2. Pay Down Debt:

Now, this doesn’t mean that you have to rush to pay down every single type of debt. For instance, if you have a mortgage, you don’t have to have to push yourself to pay it down faster. As long as you can make your monthly (or bi-weekly) payments in full and on time, you can rest assured that the debt isn’t an issue.

However, you should focus on paying down revolving credit accounts like credit cards and lines of credit, especially when they have large outstanding balances. These balances can grow out of control because of compounding interest. This is particularly true with credit cards, which typically have annual percentage rates over 20%.

So, before you start investing in stocks, you’ll want to invest your efforts in paying down these balances. Doing this will remove growing debts off your shoulders. It will also give you more available credit to rely on when it’s absolutely necessary, like when your emergency fund is empty and you have to pay off an urgent, unplanned expense.

3. Save for the Future:

After building an emergency fund and dealing with your debt, you will want to start saving up for your future. That’s right—you will want to put together a retirement fund.

A retirement fund is actually a great first step into the investing world. After all, specialized retirement savings accounts like 401(k)s and IRAs do come with investments that are supposed to help your contributions grow over time. 401(k) plans typically offer mutual funds and EFTs (exchange-traded funds) as investments. IRAs offer even more investment opportunities, including mutual funds, EFTs, Certificates of Deposit, bonds, and of course, stocks.

If your workplace offers a 401(k) plan, you should sign up for it as soon as possible. Try to max out your contributions. If your employer offers contribution matching, take advantage of this feature to get the most out of your savings throughout the year.

What if your workplace doesn’t offer a 401(k) plan? You can open up an IRA all on your own. Choose between a traditional IRA and a Roth IRA. A traditional IRA is a tax-advantaged account that will allow you to defer taxes on your contributions. Instead, you will pay income taxes on the withdrawals that you make during your retirement years. A Roth IRA will allow you to make contributions after taxes, meaning you won’t be taxed on withdrawals in your retirement. Pick the arrangement that works best for you.

You can have a 401(k) and an IRA at the same time. An IRA is a great backup account to store savings once you’ve maxed out contributions in your 401(k).

With an emergency fund, a retirement fund, and a smaller amount of debt, you’ll be in a much better financial spot. You’ll have a stable financial foundation. It’ll be safe to start dabbling in the stock market.