5 Key Steps to Follow Before Investing Further in the Stock Market

According to a recent study, more than half of working adults in the United States say they are behind on their retirement savings, including 37% who feel significantly behind. Bankrate Survey.

I'm a debt-free, soon-to-be-retired millionaire who teaches financial freedom habits to those who feel behind on their financial goals. Unfortunately, I've learned that many people try to catch up on their retirement savings by investing in the stock market before they can truly afford to.

While the stock market can be a powerful way to build wealth, there's no guarantee that you'll make money, especially if you're unable to invest for the long term because your fundamental finances aren't strong.

Here are five essential steps to take before making your next stock investment. These habits helped me save and invest over $1.7 million before I turned 40, as a first-generation Filipino American woman and self-taught money enthusiast.

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Keep one month's worth of expenses in your regular checking account

I recommend keeping one month’s worth of living expenses in your regular checking account, where you usually pay your bills, called your cash reserve. This ensures easy access to cash for everyday expenses without having to dip into your savings or investments, and allows your bills to run automatically.

Not only does this make it easier to focus on learning the new skills required to be a great investor, it also allows you to step away from the day-to-day grind of living by always being ahead of your monthly bills.

Create a “Stuff Happens” fund in a high-yield savings account

In addition to your cash reserve, I recommend setting aside one month’s worth of extra expenses in a high-yield savings account. Rather than calling it an emergency fund, I call it a fund for when things happen, because it doesn’t have to be a life-or-death event to need access to this financial safety net.

It’s safe to assume that unexpected events will happen regularly, even if they aren’t serious. By building in a cushion for unexpected expenses, you’ll not only have peace of mind, but you’ll also be able to afford to lose money on your investments without compromising your daily needs.

I specifically recommend a high-yield savings account, as many of them offer around 5% interest, making them a way to grow your money without much risk, as long as the bank is FDIC insured.

Maintain a monthly budget routine for at least six months

If you’re not willing to commit to a monthly budget for at least six months, it’s unlikely you have the patience or discipline to become a strategic investor. Understanding your spending habits and taking control of your finances is essential to identifying areas where you can save more to allow you to invest more in the future.

Since 2016, I have been creating a consistent monthly budget using three basic categories. Through this consistent habit, I have been able to identify additional funds that I can risk in the stock market without worrying about whether my bills will be paid or not. Consistent budgeting is the cornerstone of building a solid financial foundation before you can seriously invest in the stock market.

Eliminate all credit card debt

I get asked the same question a lot: Should I pay off my debt or invest? If that debt is credit cards, focus on paying off all of your credit card debt before investing more in the stock market.

Credit card debt often comes with high interest rates, often ranging from 15% to 25% or more. Even with a successful stock portfolio, the average annual return can be around 7% to 10%. And that's if you know what you're doing.

It’s simple math: The interest you’re paying on your credit card debt likely far exceeds the returns you’d earn on your investments, resulting in a net loss to your overall financial picture. As a beginning investor, you’re unlikely to see returns in the 15% to 25% range in the short term. Once you’ve eliminated your credit card debt, you’ll have even more cash to put toward future investments.

Open an Individual Retirement Account (IRA)

Consider opening an Individual Retirement Account (IRA) to take advantage of tax benefits that can help your retirement savings grow more efficiently. Investing in an IRA allows your stock investments to save on heavy taxes, and the penalties for early withdrawal will encourage you to hold on to them for the decades it takes to generate significant returns.

Investing in the stock market is risky. It's even riskier if you don't have a solid financial foundation. By following these five steps, you can invest in the stock market with the confidence to make it a long-term habit, rather than a short-term fix.

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