Investing is hands down the best way to grow your wealth over the long term, but it's not for everyone. Even if you're confident you've made some great stock selections, that doesn't mean you're ready for the risk that comes with tying up your savings in assets that experience rollercoaster ups and downs. Before you do that, you need to take care of some housekeeping so you won't be forced to sell or move your money at an inopportune time.
1. Build an emergency fund
If you don't have an emergency fund, you should not be investing your money. Period. If you have all your savings in stocks and you get in a car accident, end up in the ER, or lose your job, you'll need your money immediately and you won't be able to be choosy about when you take it out. That could mean selling at a loss and living with the consequences.
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An emergency fund virtually eliminates this risk. It's cash you keep accessible in a savings account to help you cover these unplanned emergencies so you don't have to sell your investments. You should save at least three months of living expenses in your emergency fund, but it's not a bad idea to save six months' worth or even more if it makes you feel comfortable.
In terms of your financial goals, building and maintaining an emergency fund should be second only to paying your bills. Determine how much you want to save and set aside your extra cash every month until you get to that amount. Then, you can turn your attention to investing. And don't forget to replenish your emergency fund every time you use it so it's ready for next time.
2. Pay off high-interest debt
High-interest debt has the potential to cost you more than you could earn from the best investments, so if you have any, you should pay it off before you think about investing. After building your emergency fund, put all your spare cash toward paying down your debts. Make at least the minimum payment on all of them, then put whatever extra money you have toward the debt with the highest interest rate first. When that's paid off, move on to the debt with the next-highest interest rate, and so on.
You don't have to pay off all your debts before you start investing. Mortgages, for example, have low interest rates, so there's nothing wrong with investing while you're still paying off your house. But if you have credit card debt, which can carry APRs of 30% or more in some cases, or payday loans, which sometimes have APRs in excess of 100%, paying these off is more important than investing.
For credit card debt, try a balance transfer card. These have introductory 0% APR periods where your balance won't grow, so all the money you have goes toward paying off your existing debt. A personal loan is another option. These loans can also have high interest rates because there's nothing your lender can use as collateral if you fail to pay it back. But the rates are still better than what a credit card company or a payday lender would charge you. Plus, you won't have to worry about your balance continuing to rise.
3. Find the right broker
You can always move your money to a different broker later if you decide you don't like the one you're using, but this is a hassle and your current broker may charge a transfer fee. It's best to do your research before you begin investing to determine which broker is the best fit for you.
There are several factors to keep in mind when choosing a broker, including:
- Fees
- Account types
- Investment options
- Mobile tools
- Educational resources
Only you can know what's most important to you. Make a list of your must-haves and then look for a broker that has those. For example, if you know you want to buy fractional shares, that's going to shorten your list of possible brokers right away because not all companies allow this right now.
As you become more experienced, your needs may change and then it might make sense for you to move to a different broker. But doing your research upfront can help you avoid moving your money around unnecessarily.
It's tempting to want to jump right into investing, but that can prove as costly a mistake as trying to time the market or betting big on some unproven stock. Work on the above goals first, and while you're at it, keep learning about how to invest wisely. When you're finally ready to jump in, you'll be off to a fast start.
