Investing your money in the stock market can be a great way to grow your wealth over time.
On average, the US stock market has returned around 9% per annum. Really enticing, amirite?
However, before you start putting your hard-earned money into stocks, here are four things you should take note of.
1. Pay off all your high-interest debt
First, it is important to pay off high-interest debt, such as credit card debt, which can compound over time and accumulate interest rates as high as 24% per year.
It is financially prudent to clear any loans with interest rates above what the stock market can potentially yield.
Investing in stocks without first paying off high-interest debt can result in a “loss” due to the difference in interest we have to pay on loans and the investment returns we get from stocks.
2. Get adequate insurance coverage
Secondly, insurance coverage is important to safeguard against unexpected life-altering events such as hospitalisation and critical illness.
Without sufficient insurance protection, we could be forced to liquidate our investments to pay off any hospital bills or other unforeseen expenses, delaying our financial goals.
It is advisable to consult a trusted financial advisor to ensure adequate insurance coverage throughout various life stages.
3. Build up your emergency fund
Thirdly, it is recommended to save at least three to six months of our monthly expenses as an emergency fund. This fund would be useful during unforeseen circumstances such as a job loss.
Those who don’t have a steady income may want to set aside a larger amount than full-time employees.
However, we should avoid stashing too much away into our emergency fund as the “extra” money can be put to better use to get higher returns than a savings account.
4. Have a long-term horizon
Investing in the stock market requires a long-term perspective (and of course, relevant knowledge). Anything less than five years is considered short term in my opinion.
While the stock market rises over the long term (if history is anything to go by), there is too much uncertainty and volatility in stocks in the short run. A drop of 10% or more in any given year would be considered normal.
If you need the money in the next couple of years, it’s better to place it in low-risk instruments like a savings account or Singapore Savings Bonds.
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