Make These 3 Moves Before You Start Investing

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Ready to invest? Read on to see which items you need to check off your list first. 

Investing money is a great way to grow wealth over time. Over the past 50 years, the stock market has delivered an average annual 10% return (before inflation), based on the performance of the S&P 500 index. This means that if you were to invest $5,000 today, sit back over the next 30 years, and allow your money to grow at a rate of 10% per year, you’d end up with over $87,000.

But eager as you may be to start investing, there are a few key items you’ll need to tackle first. So be sure to check these off of your list.

1. Make sure your emergency fund is complete

It’s really important to make sure your savings account has enough money to cover a full three months of essential bills. That could be your ticket to getting through a period of unemployment. Or, it might enable you to cover an unexpected home or car repair without having to resort to borrowing money.

If you don’t have a complete emergency fund, hold off on investing your money until you have one. The value of your stock portfolio could fluctuate from week to week (or even day to day). And you don’t want to land in a position where you have to cash out stocks at a loss to scrounge up funds to cover an emergency. So first make sure to build adequate cash reserves and then put extra funds you have into an investment account.

2. Develop an investment strategy

You don’t want to open a brokerage account and start scooping up stocks at random. Rather, you should have a strategy.

First, decide what you’re investing for. Is it retirement? Another objective?

Next, decide how much work you’re willing and able to do. Buying stocks individually means having to research each and every one. A more efficient way to build a portfolio may be to load up on broad market ETFs, or exchange-traded funds. These make it possible to own many stocks with a single investment.

Of course, stocks aren’t the only investment vehicle you can consider. There are also bonds, which tend to deliver lower returns than stocks but also tend to be less volatile.

Think about your tolerance for risk as well as your goals. That should help you put together a portfolio that works well for you.

3. Find the right account to invest in

You may be inclined to invest in a taxable brokerage account so you’re not restricted in the amount of money you can put in yearly or your ability to take withdrawals as you please. But if you’re investing for the express purpose of being able to cover expenses in retirement, then you may want to invest in an IRA — either a traditional one or a Roth.

IRAs offer tax benefits that regular brokerage accounts do not. With a traditional IRA, your contributions go in tax-free, which means they exempt a portion of your income from taxes. With a Roth IRA, investment gains in your account are tax-free, and so are withdrawals.

Of course, IRAs limit the amount of money you can put in each year, and tapping one before age 59 1/2 could result in a costly early withdrawal penalty. But if you’re committed to investing for your retirement, then it could pay to choose an IRA.

Investing for the first time can be an exciting milestone. Just be sure to make these essential moves before you dive in.

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