Congratulations! Investing is an important part of overall financial wellness and an important tool for building wealth for your future. The first step is to ensure that there aren’t other pieces of your financial foundation that need to be laid in place before you commit money to the market. The next step is to look at your options for investing and to choose which is right for you.
Because the stock market has performed so well in recent years, and also because meme stocks and cryptocurrencies have gained popularity, we’re seeing a lot of people eager to take the plunge. It’s important to make sure that you’ve got the basic groundwork in place, most importantly, you want to make sure that:
Before investing it’s essential to have an emergency fund. Most Americans can’t cover a small emergency with their savings. If this describes you, you’ll need to put off investing until you can save around 3 months of your expenses. The stock market can be volatile, and if you need to access those funds when the market is down, you could lose money in the process. Remember: the stock market isn’t a savings account.
Look at your options for investing and consider the advantages and disadvantages of each one. In personal finance we often use established orders of operations. Do you have a 401k, 403b, or or 457a offered to you through your workplace, and your workplace offers a match, you should almost always contribute up to the match so that you can take advantage of that free money. These plans are also advantageous because they typically involve pre-tax contributions, which means you won’t pay income taxes until you get distributions of those funds in retirement. This can help you to keep more money in your pocket now or open up money to invest in other ways, and you will never pay capital gains taxes. Alternatively, if you invest in an individual brokerage account, you’ll be using after tax dollars AND you’ll pay capital gains taxes when you cash out the stocks.
Consider what your investments are for. Why do you want to invest? If you are investing for retirement, you’ll benefit the most from investing in a 401k or similar due to the tax advantages, however, you won’t be able to easily access the funds until you are 59 ½. If you are looking to invest for financial obligations coming up much sooner, an individual brokerage would be a safer bet, but you may want to ask yourself whether it makes sense to shift your priorities so that you can start making retirement investing a non-negotiable part of your budget. A strong foundation can become a springboard to better things later on.
Remember that investing for retirement IS investing. I hear a lot of people say that they want to start investing, only to find that they contribute regularly to a 401k and have a large amount put away for retirement. 401ks may not be as sexy as a skyrocketing meme stock, but it is an investment. It just isn’t a fad.
With such a strong market in recent years, some of us have felt the FOMO when it comes to where we put our money. Before you make any sudden movements, be sure that you have your basics covered and that regardless of where and how you are investing, it isn’t negatively impacting your daily bottom line.
I want to invest! Should I invest in my 401k or buy stocks on my own? is written by Terri Bennett, A Certified Financial Trainer for financialgym.com