While about half of all Americans hold some investments in the stock market, only an estimated 20 percent own equities beyond an employer-sponsored plan. So if you are actively investing your money, you’re already ahead of the curve.
But before you look to pump more money into the market, take a moment to ask yourself a few questions first.
First, how much debt do you have — and what kind of debt is it? Unsecured debt — credit cards or a line of bank credit, for example — can have high interest rates, costing you lots of money in the long run.
Here’s what I mean: If your credit card has an interest rate of 18 percent, you would have to earn that much after taxes on an equal investment just to break even. That’s not a good gamble.
Here’s another way to look at it: Say your credit card has a balance of $2,000 at 18 percent and you are currently paying $50 a month. At that rate, it will take more than five years to retire the debt and you’ll pay $1,077 in interest. If you increase your payment to $150, the debt is gone in 15 months with just $248 paid in interest.
So pay off that high-interest debt first then bulk up your investment portfolio.
On the other hand, if you have a fixed mortgage or other relatively low-interest debt such as student loans, it’s perfectly acceptable to continue to make your scheduled payments while using surplus income to invest — and in fact, doing so will help you in the long run, so long as you’re not investing so much that it threatens your ability to make your debt payments.
Once you’ve passed the debt test, ask yourself: Might I soon need access to the money I’m thinking about investing?
If you want to invest in the stock market to make a quick buck — DON’T! Although there’s no shortage of so-called experts ready to sell you on their can’t-miss stock tips, you should not invest money that you know you’re going to need within a couple years. Instead, find a risk-free investment or savings account with a guaranteed return.
Finally, decide how soon you want to retire. The general rule is, the closer you are to retirement, the more conservative you should be with your investments. If retirement is within your five-year plan, be sure your investment portfolio contains a healthy mix of stocks, bonds and money-market savings or other cash equivalent such as Treasuries so that your risk is reduced. If retirement is a near-term goal, you should put your money somewhere safe.
Now, if you’ve answered all those questions, you’re probably ready to invest. The next step is to start your research — what kind of stocks am I interested in? How much assistance will I need from my financial adviser? What are my ultimate goals?
As you conduct your research, be sure to visit www.wealthmagazine.com often. Read the articles geared to investing, listen to some podcasts and, before you know it, you’ll be closer to finding true wealth.
