3 Things to Do Before Investing in the Stock Market
Investing in the stock market is often viewed as one of the best ways to grow wealth and reach long-term financial goals. Unfortunately no handbook is given out when you start to invest, which leads to mistakes, discouragement and a decision by some to give up on investing altogether.
If you find yourself in need of guidance as you start investing in the stock market, below are some tips to help get you started.
1. Review your finances.
The first thing you should do is determine how much money you have to invest. Take a look through a wide-angle lens to view your entire financial life. Ask yourself:
--Am I currently carrying any consumer debt?
--Do I have an emergency fund to cover my needs in the event of a job loss?
Depending on the answer to those two questions, you should be better able to determine how much you have to invest in the stock market. Do not worry about how much or how little you have to invest, as the key is to start investing. This is where the idea behind compound interest comes into play. The sooner you begin, the more time your money has to grow. With wise investments, a little can turn into a lot over a long period of time, so don't let a small starting amount scare you away from investing.
2. Educate yourself.
Education might be the most important factor in early investing success. This is especially the case if you haven't had much experience with investing prior to now. If you are like many beginning investors, you may not know where to look for quality, unbiased investing guidance. While there are many resources online, the best resources can be found through your 401(k) provider or online brokerage. In most cases, this education is free and can be a great boost to your investment knowledge.
Not only will educating yourself help you feel less overwhelmed when it comes to investing, it should also help your bottom line because you'll learn how to recognize high-fee investments, avoid them and move toward a purposeful investment strategy.
3. Invest with a plan.
It may sound obvious, but one of the first things you should do when you start investing is come up with an investment plan. This investment plan can be as simple or as detailed as you want. Think of it like using a map or GPS when traveling on vacation. You likely will get nowhere near your chosen destination without a form of navigation, and investing is no different.
The investment plan stage is where you need to determine your investing goals. For example:
--Are you investing for retirement?
--Are you investing for a child's college education?
--Are you investing to provide income now that you're retired?
These are just some of the questions you can ask yourself. The key to is to make your plan personal. Tailor it to the amount of time you have to reach your goals and your risk tolerance. Your answers to questions like the ones above will help you form a framework for your investment plan that can ultimately help you reach your investing goals.
The bottom line: Investing in the stock market can be overwhelming, but by following a few simple steps, you can start down the road of investing for your future needs.
John Schmoll is the founder of personal finance website frugalrules.com, an online community centered on increasing financial literacy, budgeting, investing and finding freedom through frugality.
