Don’t start investing until you’ve accomplished these 2 things, says CFP
Popular financial advice will tell you to invest in the stock market early and often in order to see the greatest returns — but you may want to hold off until you've hit two financial milestones.
"You're constantly told [to] put money in the market as soon as possible so your returns can compound, and I don't disagree with that," Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, told CNBC's Frank Holland during the CNBC Make It: Your Money virtual event on Oct. 17.
"But this assumes you don't need to go to that well and interrupt those investments, that you can actually stay invested," Boneparth said.
By building a financial foundation, you'll be better suited to withstand volatility, whether that be an unexpected loss of income or a costly hospital visit.
To build stability into your finances, here are two critical actions to take before investing anything in the stock market.
1. Tackle high-interest credit card debt
With credit card debt topping $1 trillion for the first time this year — and average interest rates over 21% — Boneparth said consumers should focus on paying off high-interest credit card debt before they even think about investing.
If your credit card debt carries an interest rate of 15% or more, "get rid of it as soon as possible," he said.
While your money could earn returns between 6% and 8% in the market, it's not enough to make up for paying 20% in credit card interest. Because of that, tackling high-interest credit card debt should be first and foremost on your plan of action, Boneparth said.
In addition to paying down credit card debt, you should also examine your spending habits. Asking yourself why you're amassing credit card debt and whether you can really afford to do so can help improve your financial behavior.
"If you're accumulating credit card debt, it generally signals that we have something going on with spending behaviors that needs to be rectified," said Boneparth. "Are there big decisions we need to make or sacrifices to prevent that?"
2. Build up an emergency fund
Just over half of Americans report having no emergency savings, according to the CNBC Your Money Financial Confidence Survey.
But a cash reserve is crucial to financial stability, Boneparth said.
"There's always ups and downs, so having that cash reserve [be] three to six — maybe even nine — months of your living expenses ... is critical to then being able to move on to investing," he said.
Even though placing money in the stock market early gives it more time to compound, it will do you little good if you have to dip into those investments to pay for unforeseen costs.
"At the end of the day, I want to see that foundation built by having that reserve before you invest, even if it means missing out on a year or two of compounding or getting your money in the market," Boneparth said. "If you make that sacrifice for the benefit of stability so you don't need to touch investments later on, it would be worth it."
But building an emergency fund can be tough, especially for the 60% of Americans who report living paycheck to paycheck.
To start an emergency fund, experts recommend tracking your spending to cut out unnecessary expenses, placing cash windfalls like tax returns in a high-yield savings account and automatically depositing a portion of your paycheck into savings each time you get paid.
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