Stop: 5 Things You Must Do Before Buying Stocks!
Are you interested in buying stocks? Before you do, you need to get the rest of your house in order. Historically, the S&P 500 has returned about 11.5% a year including dividends. But if you are carrying credit card debt, you are probably paying more than that rate in interest. Furthermore, if you are not contributing to your 401k you may be passing on free money from your employers match. Buying stocks directly also carry expenses like transaction fees and taxes. If you sell your stocks within a year, you’ll have to count any earnings towards taxable income. Any stocks sold after 1 year are subject to a 15% capital gains tax. Make sure you max out any tax advantaged investment accounts available to you first.
Don’t invest in stocks before completing the following tasks.
- Contribute to your 401k - Many employers will give you 50% on the dollar up to a certain percentage. Its free money and you would be crazy not to take it.
- Pay off Credit Cards - Credit card interest can be very expensive. Pay off all of your credit cards before you even begin to consider stocks.
- Contribute to a Roth IRA - This is a retirement account with great tax advantages. After you max out your 401k matching percentage, the Roth should be your next investment target. Your principle and interest will be available to you tax-free when you retire.
- Build an Emergency Savings Account - Build up at least 3 months of emergency savings before you start buying stocks.
- Pay off your Car Loans - Car loans can also be expensive. Unless you have a great rate, pay off this debt before you divert any money to stocks.
