You have a few bucks set aside, and you're thinking of starting to get a little bit Foolish with your dough. Maybe you've even read about choosing a broker to make your first purchase of stock...
Hey! Whoa there!
Not so fast, buddy -- what's your rush? We know you're on the information superhighway and all, but believe us, when it comes to investing money you've worked hard to earn, you want to obey all the speed limits. Your personal finances need to be in squeaky-clean order before you ever think of placing that exciting first stock trade.
First stop... how thick is your billfold these days? Is it full of cash or credit cards? One of the critical keys to investing is only to use money that is free of other obligations. Thus, if you are carrying a revolving balance on your credit cards, it ain't free! (Neither are you, unfortunately.) Here's why: Many credit cards have an annual interest rate of 16%-28%.
Let's say you have $5,000 to invest, but you also have $5,000 in credit card debt with an average annual interest rate of 18%. If you invest the $5,000 instead of using it to pay off the credit card, you will have to get an 18% return on your investment after taxes (or about 24% before taxes) just to break even.
Credit card debt remains the single best answer we know to the question "Why can't I ever seem to get ahead?" As of this writing, there are more than a billion credit cards in circulation in the United States -- that's almost four cards for every American man, woman, and child. And nearly 70% of all credit card holders in the U.S. today carry a revolving card balance each month (i.e., they're just paying the minimum amount due).
On a card with an annual interest rate of 18%, making minimum payments (2% of the balance or $10, whichever is greater) on just a $1,000 balance is going to take you a little over 19 years to pay off. During which time you will pay close to $1,900 in interest on that $1,000! It's enough to want to get into the credit card issuing business, isn't it? When you're ready, you can think about investing in a company that does.