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Former SEC investment management director shares his No. 1 piece of advice for new investors

We spoke to Norm Champ, former SEC investment management director, about how beginner investors can get ready to invest in the stock market.

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10'000 Hours | DigitalVision | Getty Images
Select’s editorial team works independently to review financial products and write articles we think our readers will find useful. We earn a commission from affiliate partners on many offers, but not all offers on Select are from affiliate partners.

As robo-investing apps and TikTok investing advice become more pervasive, and aspiring billionaires race to become the next cryptocurrency tycoon, today's beginner investors (and the investing-curious) have to wade through lots of competing information.

Over half of U.S. households have some kind of investment in the stock market, but that doesn't mean that everyone feels confident about how they're managing their money.

In order to invest safely without jeopardizing your short-term financial security, you need to make sure you check a few boxes. You should have an adequate emergency fund and enough financial stability that you're prepared to let your money mature in the market for at least three to five years. You need to have enough cash to cover your lifestyle — including housing payments, food, insurance and all the extras — for the foreseeable future, so that you won't find yourself in a tough spot if there's a market downturn (and there's always a market downturn at some point).

This level of financial stability is a lot easier to attain when you're debt-free, argues Norm Champ, former director of the division of investment management at the Securities and Exchange Commission (SEC). His number-one piece of advice for new investors is to be debt-free — or at least have your debt in a manageable place — before you dive in.

"Lots of people are coming out of school with debt," says Champ. If you're in this boat, don't worry too much, he advises. But it's never too early to start making a plan for how to move from paying off debt to investing in the market.

Most new grads don't land high-paying jobs right out of college. It usually take a while to earn enough to have money leftover for discretionary spending. Once you're making enough to cover your day-to-day expenses with some cash remaining, you're in a good position to start making strategic financial decisions.

Hitting this milestone is your first opportunity to prepare yourself for investing, argues Champ.

"We're all being bombarded non-stop to spend," he argues. But thinking about long-term goals from a young age should motivate you to be strategic with any discretionary income you have. Rather than using it to make purchases that won't appreciate in value, such as a brand-new TV or Air Pods, think about ways to use it that will add to your long-term wealth.

"Ask yourself, 'What am I doing to do with this extra income?'" says Champ. If you abide by the common 50/30/20 rule, you should try to allocate at least 20% of your paycheck to put toward building an emergency savings fund and debt payoff.

Once you've built up a nest egg of roughly six months' worth of savings, and your debt is under control, this 20% can go toward investing.

The best place to start investing, says Champ, is with a simple mutual fund comprised of both stocks and bonds.

"Get yourself going, then you can branch out," he says. Typically, investing in individual stocks is more volatile, whereas a mutual fund with a percentage of both stocks and bonds is more predictable with longer-term returns.

Even if you only have $50 leftover each month, plug this amount into an investment calculator to see how much it will grow over time. A mutual fund with a projected return of 7% can grow from a $500 initial investment to over $9,000 with just a monthly contribution of $50 over 10 years.

To make investing even easier, find ways to automate it. Set up an automated transfer around the time you get your paycheck every month or every two weeks. And if you already use a cash-back credit card, consider one geared toward investing.

To get you started, we analyzed the most popular cash-back investing credit cards to help you make the most of your points, and we rounded up a few of our best picks below.

The best credit cards for investing cash back

Fidelity® Rewards Visa Signature® Card

Information about the Fidelity® Rewards Visa Signature® Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
  • Rewards

    2% cash back on every eligible net purchase

  • Welcome bonus

    N/A

  • Annual fee

    $0

  • Intro APR

    None

  • Regular APR

    13.99% variable

  • Balance transfer fee

    Either 3% of the amount of each transfer or $5 minimum, whichever is greater

  • Foreign transaction fee

    1%

  • Credit needed

    Good/Excellent

Terms apply.

Pros

  • Straight-forward cash-back program
  • You can deposit your rewards in up to five qualifying accounts at a time
  • Visa Signature® perks and benefits

Cons

  • 1% foreign transaction fee

Our methodology

To determine which cards will put the most money back in your pocket, CNBC Select evaluated 50 cash-back credit cards offered by the biggest banks, financial companies and credit unions that allow anyone to join. We compared each card on a range of features, including cash-back rewards, annual fee, welcome bonus, introductory and standard APR, balance transfer fee and foreign transaction fees, as well as factors such as required credit and customer reviews when available.

While investing your cash-back rewards is an easy way to passively invest in the stock market, it is not a comprehensive financial plan. Investing cash back rewards is an added benefit to card membership and not meant to not replace retirement savings or emergency savings.

Information about the American Express Platinum Card® for Schwab has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.