Investing in the stock market or in real estate is one of the best ways to build wealth, since stocks and real estate yield higher returns than any other type of investments. But there is also a lot of risk involved. If you’re ready to invest in the stock market, you need to be sure that you’re prepared to face the risks. There are several signs that could indicate that it’s not the right time for you to invest. This article discusses several signs you should look out for before you start investing your hard earned money.
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1. You Have Too Much Debt
If you have too much debt, whether it is credit card debt, student loans, or car payments, investing in the stock market can lead to financial disaster. A mortgage on a home is considered a good debt, but credit card debts are considered bad debts and you need to make sure they are under control before you think of investing in the stock market.
Credit cards tend to carry the highest interest rates, usually between 18 to 21%. If you don’t pay your full balance on your cards each month, you are charged interest on the outstanding transactions and the interests you are charged will increase the debt and it may take longer to pay off the card. Before you start investing in the stock market, it’s probably a better idea to payoff your credit card debts first.
2. You Don’t Have an Emergency Fund
When you’re investing in the stock market, you face a lot of risk. The market fluctuates, meaning that one day a share might be worth $30; the next day, it is worth $0. So the risk of losing all of your money in the stock market is always there. If you lose all of your money in the stock market and you don’t have an emergency fund, you are in financial problems if a sudden emergency arises such as your car breaks down and needs a major repair.
So an emergency fund gives you peace of mind knowing that you have enough money saved up in case of an emergency. A good rule of thumb is to have cash equal to 3 to 6 months of living expenses. So before you start investing, make sure you have enough cash for emergencies.
3. You Think Investing in the Stock Market is a Short-term Goal
What no one tells you is that investing in the stock market is not a short-term goal. Short term goals would be saving for a holiday, or saving for a home deposit. A long term goal would be saving for your retirement. You may have 6 months to two years to save for a holiday or to buy a house. But you might have 30 to 50 years to save for your retirement.
If you know you are going to buy a house, say in 2 years, the best way to save for it is to save in a high savings account. Why is that?
Well, buying a house in this instance is considered a short term investment. Short term investment does not have time to ride out the ups and downs of the stock market. Savings accounts are good option for term savings.
Whereas if you are saving for retirement, a long term goal, you have time to ride out ups and downs in the market, which means that you can take on a higher level of investment risk.
In short, if you are saving money for a short period of time, don’t use higher-risk investments, such as stocks. High yield savings accounts are more suitable for you.
4. You Don’t Have an Investment Goal
Think about your goals before you think of investing in the stock market or in the real estate. Some people think that investing in the stock market is another way to ‘get rich quick.’ Most wealthy people look at investing in the stock market as a long-term approach. They find some great stocks and hold on to them for decades.
In the case of real estate, it can take years before you start seeing any real return on your investment, because most of your payments go towards your mortgage loans early on.
A good approach to investing is to identify what you want to achieve and by when. Once you have identified your goal, you will be more confident and therefore ready to start investing in the stock market.
5. You Don’t Know the Risks Involved in Investing
When you invest in the stock market, one thing you have to bear in mind is the market risk. The market fluctuates, so the price of stock changes daily, which can reduce the value of your stocks at any given day. There is also a liquidity risk. In other words, you may not be able to access your cash as quickly as possible. If you need to withdraw money from your stock investments, you have to sell the stock first and that can take a few days.
With real estate, the money can be a little more accessible if it is a rental property. The money you receive monthly from rents can be readily available as long all of it does not go to mortgage loan, insurance, or taxes.
Investing in the stock market is not for everyone, but it’s better to find out before you face all of the risks. While the idea of waiting to invest in the stock market may not be a good idea (because the earlier you start, the better) taking the time to address any financial trouble spots can ensure that you are ready when the time is right.