Congrats! You've made the decision to invest in the stock market. Or, you are thinking about it. In the journey to build wealth, you are already ahead of millions of people!
Before starting, you need to make sure you are financially ready to invest in the stock market. I know it is super exciting to get started and pick that stock, and watch it grow, but the foundation matters. Build the foundation right and you'll be set for life.
The pyramid of financial health
If you think about your overall investment plan, it should look like a pyramid, with several layers. Each layer represents one type of investment. The more you move up in this triangle, the higher is the risk and the higher is the reward. It's better not to skip the foundation layers.
To explain better, let's go through a few examples:
- On the bottom, you have your emergency fund (3 to 6 months of your living expenses) that is saved and secured in a bank account that you do not really invest, except in safe and secure Certificate of Deposits (CD) or something like that. This is to protect you financially, in case you lose your job, or an unexpected emergency happens. You don't want to be in a situation that you are forced to sell your assets or borrow just to take care of an emergency.
- Next, you have your retirement accounts (known as 401k and IRA) that help you invest and give you several tax advantages. There are also other accounts with tax advantages. Things like your kids colleague fund or tax-advantaged health saving account. Each government offers different tax advantaged accounts. You would want to take advantage of those government-offered opportunities, before jumping into riskier options.
- The next layer in your pyramid is investing in things like ETFs, Index Funds, and individual companies. Investing in startups, concurrency, art, real-estate are some of other layers you may consider.
Before investing in stock, make sure you have the foundation ready. Take care of your emergency fund and explore the tax-advantaged accounts and opportunities the government or even your employer offers.
Once that's done, you can can move to the next step.