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It’s a common misconception that you need to be wealthy to start investing. While having more money certainly makes it easier, you can actually begin investing with just a small amount. However, that doesn’t mean you should jump in without preparation. There are several important financial milestones you should hit first.
Not long ago, we debunked the myth that investing requires large amounts of capital. There are many mutual funds that allow you to get started with as little as a hundred dollars. For more details on the myth, check the link above, but the key takeaway is this: before you invest in the stock market, make sure you have a few things in place.
That said, contributing to your employer-sponsored 401(k) plan is a whole different ball game. If your company offers a retirement match, that’s essentially free money, so you should take advantage of it. After that, be sure to address the following financial matters before considering investing outside of your employer’s plan:
Build an emergency fund: Make sure you have cash saved up for unexpected situations. You never want to touch your investment accounts in a crisis. Doing so could lead to substantial taxes and fees.
Eliminate high-interest debt: Pay off any high-interest debt before you even think about investing. The interest on that debt can easily cancel out any investment gains. In fact, financial expert Luke1428 goes a step further, suggesting that all non-mortgage debt should be cleared.
Set up a financial plan: We advocate for paying yourself first, meaning saving your money before spending it, but you should also have a budget or financial strategy. It’s important to understand how your money is working before putting it into investments. Do your research, learn the basics of creating a portfolio, and make sure it aligns with your budget. Set clear financial goals as well. Depending on your goals, the stock market may not always be the ideal place to park your money.
Ensure you’re properly insured: Don’t cut corners on insurance. While you don’t need every policy, make sure you’re sufficiently covered in case of emergencies. We’ve shared tips on how to determine the right amount and type of insurance for you.
In conclusion, saving for the future is a wise move, and investing can play a key role in that. While it’s possible to start with a small amount of money, it’s not advisable until you’ve achieved certain financial milestones. You need a solid plan and a safety net, and it’s crucial to be free of debt before moving forward with investing.
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