Before opening that online brokerage account…
Before picking your favorite fund or your favorite stock…
Before placing your first trade…
Before doing ANYTHING that resembles investing, it’s in your best interest to learn more about the BIG THREE and make sure you’ve got them covered.
The Big 3 include:
1. Consumer debt
2. Emergency fund, and
3. Retirement account
Although the fast & sexy adds that appear on your YouTube account and across your cell phone or TV screen will try to convince you otherwise, investing is no different from any major endeavor in life: It’s a process that you plan for and build-up to, NOT a lottery.
Except for child prodigies, no kid graduates from elementary school and jumps straight into college. No junior politician who just won her first local election can possibly be ready to make a realistic run for the White House. Likewise, a young pilot needs hundreds (perhaps thousands) of hours of flight experience before she is ready to command a large passenger jet.
Investing is just like any of the above examples. You need to cover the basics, before you earn your wings.
Let’s explain the Big 3 one-by-one:
A. CONSUMER DEBT includes personal debts related to credit cards, student loans, and auto loans. Unaddressed consumer debt (i.e. unpaid credit cards) has the potential to drown you in a sea of interest rate charges. As your debt grows, your credit score will also deteriorate, potentially costing you thousands of dollars (in lost savings) over your lifetime. Unfortunately, the dream of striking gold in the stock market is just a distraction from the sense of urgency and focus you’ll need to pay-down your debt. Don’t let distractions keep you from improving your standard of living! Build a month-by-month plan to gradually cut your debt to zero. If you stay motivated and disciplined, you’ll be one step closer to investing.
B. An EMERGENCY FUND – otherwise known as a “rainy day fund” – is a highly liquid stash of money that typically includes 3-6 months of your living expenses. It will help you survive all kinds of financial emergencies related to a job loss, medical emergencies, car troubles, unexpected home repairs, or unplanned travel expenses. According to FINRA, 46% of people in the US don't have an emergency fund to cover 3 months of expenses. Don’t be a statistic!
C. Unless you have a financial goal that’s coming up soon (e.g. down payment for your first home), you want to set up a no-frills RETIREMENT ACCOUNT, rather than playing Russian roulette in a fun brokerage account. The reason: Taxes! Most retirement accounts offer great tax advantages that will help your money grow much faster than it would in a taxable brokerage account. You can pace yourself since most retirement accounts in the US have annual contributions limits (e.g. $20,500/year for 401(K)s and $6,000/year for IRAs if you’re under 50 years). If you have a job with steady income, take the opportunity to open a retirement account and start making steady contributions to it. This is the final step before graduating to the world of investing. Think of it as your college thesis.
If you have the Big 3 covered, you’re probably ready to dip your feet in the world of investments. You can invest in (almost) anything your heart desires: stocks, bonds, global funds, real estate trusts, commodities, and even a little bit of crypto. Have fun, but always be aware of what you own. For example, as a stock investor you own a real slice of a real company. As a bond investor you own a real slice in the debt of a real company.
With great freedom and great fun also comes great responsibility. If you haven’t addressed the Big 3 yet, set your flight path, surround yourself with good information and put some time towards earning your wings.
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