Those who sell investments often use charts to demonstrate the power of compound interest.
An amount invested that achieves a particular rate of return over time will grow to “x” amount of dollars. These charts can be motivating, especially when time is on your side.
You need to walk before you can run. There are a few things that should be in place before you rush to the market to make your fortune.
The most important thing you can do with extra money is create an emergency reserve.
An emergency reserve should be between three and six months of your living expenses. Do not invest your emergency reserve or keep it in a place where you can access it with a touch of a button.
If you are married, make sure to have the emergency reserve titled in such a way that will allow both spouses to access the money in an emergency.
Unemployment, health problems and insurance deductibles are a few of the many things that can trigger a dip into the reserve.
Having that money set aside allows you to be more confident in your future. Until you have created the emergency reserve, investing should be a lesser priority.
Another item that should take priority before investing is paying off high-interest debt.
Credit cards are the most obvious pay-off priority. With interest rates that can be over 20 percent, there is no reason to take a chance investing.
People who are either approaching or already in retirement often create a diversified portfolio that will generate a 4 to 7 percent return.
Any debt that has an interest rate above a reasonably expected rate of return should be paid off.
Not all debt is bad. Some interest rates are low, and some allow a tax deduction. Mortgages rates have been less than 5 percent for years and allow for a tax deduction.
There are also times when money that is being invested should be put into cash. When you are saving to make a purchase and plan on buying that item within 12 months, those funds should not be invested.
I have seen people lose down payments for a home and funds saved to buy an engagement ring just because the market turned so fast.
Another vital step to take before you invest is to have a plan. Take time to do a little research on investment concepts.
Take even more time to research common mistakes rookie investors make. You would be surprised how often a simple investment strategy beats world-class investors.
Sitting on cash can be a difficult thing to do, especially when you see others making money in the market. Ignore greed’s siren call and put first things first.