Recently, I had the opportunity to speak with a friend who informed me about her fear of the stock market. Because of the ups and downs in the market, she has decided to simply not invest at all. As a result, she is more comfortable with safe financial products such as certificate of deposits and money market accounts, which pay little to no interest.
Should you really invest at all?
Honestly, if you have financial goals, you can’t afford not to invest. Of course investing can be risky, but placing your money in “safe” financial products, such as certificate of deposits, have risks as well. These products are subject to inflation risk, which is the risk your money will be unable to keep up with today’s dollar. As a result, you really are losing money due to the loss of purchasing power.
Determining whether you should invest really comes down to your financial goals and more importantly, your time horizon. Of course, if you need the money for emergencies or for a down payment on a home in the next few years, it may not be a good idea to invest in the stock market. Since the market is volatile, especially in the short term, a quick drop in the market could damage your investment. However, if time is on your side, investing for the long term is a great idea, because losses could possibly be offset by future gains.
Before you enter the market
Now, keep in mind, before entering the market, there are some things you should do first. It is essential you get your personal financial house in order. First, you should consider putting money aside for emergencies. Next, consider putting a sound plan in place to reduce high interest debt, such as credit cards. Let’s say for instance, if you are paying 14% interest on credit card debt, you can, in turn, earn a “whopping” 14% return by simply paying off your credit cards. If you are not in a position to pay off your credit card debt, consider contacting your creditor to see if they would consider lowering your interest rate. It may also be a good idea to determine whether a balance transfer could save you money. Finally, don’t forget to participate in your company’s 401k plan. If your company matches dollar for dollar, just the mere participation can provide you with an immediate return on your money.
Remember, your choice, your future!