Opening a brokerage account is important if you hope to build wealth. Working with a broker allows you to buy stocks, which have historically earned a better return than savings accounts or most other assets.
But, while it’s a good financial move to start investing in a brokerage account at some point in your life, you actually don’t want to rush into doing this. There are a few key tasks you need to check off your to-do list first, including the following.
1. Pay down high-interest debt
Before you start investing, it can be a good idea to pay down debt that has a high interest rate. When you repay loans or credit cards at high rates, the return on investment you get is saved interest.
If you have a credit card with an average interest rate of 21.47%, it’s unlikely you’ll find any reasonable investment that can come close to providing such a high return (if you do, can you send it my way!). So, you’d be better off in this situation devoting extra money to paying your card balance off in full before deciding to invest.
Just don’t use your debt to put off investing forever. If you’re waiting to open a brokerage account because of your credit cards (or other debt), make a plan to pay it off in a specific time frame so you can get started investing as soon as possible.
2. Save up money in an emergency fund
Before you invest, you’ll also need some emergency money. You don’t want to put all your spare money into the stock market, have the market crash, and then experience a job loss or other emergency and have to immediately sell your stock at a loss. Alternatively, if you left the money invested for a while, you’d most likely see the price of your shares rebound (assuming your investment was a reasonable one) since market recoveries have always followed market crashes.
In general, you’ll want enough money saved for emergencies to cover between three and six months of living expenses. It usually doesn’t make sense to wait until you have that much to begin investing, as saving so much money can take months or even years and you’d miss out on compound growth if you waited so long to invest (that’s when returns are reinvested to earn more returns).
You should try to save enough money to have a few thousand dollars set aside for emergencies, then you can split your extra cash between investing and emergency savings so you can start investing and growing your wealth.
3. Earn your full 401(k) match
Finally, if your company 401(k) has a matching program where your employer matches some of your contributions, you should make sure you’re maxing out the employer matching funds first.
So, for example, if your company matches 50% of contributions up to 3% of your salary and you make $45,000 a year, you would want to ensure you were putting at least $2,700 into your 401(k) to earn $1,350 in free money from your company. You would not want to invest in a brokerage account first and leave these funds on the table.
If you’ve accomplished these milestones, it may be time to find the best brokerage for you, open an account, and start putting money into it so you can make your money start working for you.
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