Before you even start thinking about investing in the stock market, there’s something else that you need to do first. That, of course, is setting up an emergency fund.
The end goal of long term investment is to grow your wealth and create financial security. Unless you’re a day trader with a large amount of capital to play the markets regularly, your main goal will be to find growth stocks with a history of strong dividend payouts.
Dividends can supplement your income or help fund your retirement. With most growth stocks, this provides a sort of double win. You gain the dividend rewards over time, followed by a one-off gain when you offload the stock much later in life.
An Emergency Fund Protect you From Risk
The sweet spot for an emergency savings fund is three to six months of your regular income. The more you have saved, the more protection you will have from unforeseen events like a job layoff, medical emergency, emergency travel, or anything else that would require access to significant funds in a hurry.
An emergency savings fund should be a cash fund that is not held up in a Certificate of Deposit or similar investment product. You could require the funds at any time, so they shouldn’t be tied to long term savings where you would incur a penalty for an early withdrawal.
Building up an emergency fund could take a significant amount of time, so it’s best to start as early as possible. If you’re still young and are beginning to learn about finances, savings, and investments, then opening a savings account right away would be advisable. Save as much as you can, as often as you can, and you’ll have a financial safety net which offers you peace of mind. An emergency savings fund held in a bank account will also work as an asset when you apply for credit or even a home loan in the future.
Start Investing When You’re in a Comfortable Financial Situation
Don’t make any major investments until you are in a position where you have a financial safety net. With a savings fund, you won’t need to rely on credit or other forms of borrowing in an emergency. Once you have established a buffer with a savings account, you can start to focus more on investing, growing your wealth with more risk but greater rewards.
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