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The truth about generating wealth is that earning money and putting it into a savings account is not nearly enough. Savings accounts only generate a marginal amount of compound interest, and even this is nullified in the long-term due to the effects of inflation. If you’re serious about growing your wealth, you need to make worthwhile investments.
Normally, the best time to invest is as soon as you’re ready. The question now is how you can tell if you’re ready to invest or not. Investing when you aren’t ready is a quick road to heartache and financial stress. Here are some prerequisites to attain before even attempting to invest.
Investing in the stock market yields a reasonable 7% to 8% in returns, which is a good stock ROI. While this is likely to grow into big returns over time, this figure is easily eclipsed by the interest charged by debts in payday loans, car titles loans and premium credit card lines. These high-interest debts will easily eat up your potential returns. It’s only after you’ve paid off these debts that you can consider investing. If you haven’t paid off your high-interest debts yet, you need to come up with a plan to pay them off as soon as you can so you can start investing sooner.
Many experts will tell you that you should invest only money that you’re willing to lose. This is because you’d have to diversify your assets to produce good returns over time. Considering the volatility of the stock market, you’d have to hold onto your stocks to endure through market downturns. This means that you should avoid investing money that you’re going to need within five years.
Having an emergency fund will allow you to respond to emergencies even when you’ve invested money into the stock market. You don’t even need a fund that covers three to six months of your living expenses. A micro emergency fund of $1,000 to $2,500 is a good starting point. Simply split your spare cash between building your emergency fund and long-term investments.
You don’t need to have an expert-level knowledge of stock trading to start, but it’s important to understand the basics before beginning. It’s difficult for novice investors to select individual stocks to invest in, so the general rule is to diversify your assets. This way, if one asset performs poorly, your entire portfolio won’t be compromised. Many experienced investors even hire professionals that specialize in screening for stocks to minimize risk.
It’s also important to take note of the transaction fees involved with your trades as well as the brokerage you choose to trade with. Using the wrong broker can cost much more than is necessary.
Keep in mind that investing is not a silver bullet that can magically solve your financial woes. There’s always a level of risk involved and things can easily take a turn for the worst. You can only manage risk as best you can. This, however, does not discount the fact that serious money can be earned through investing in stocks over the long term.
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