Avoid The Stock Market When You Save Your First $1,000
You’ve just gotten your first job, and you’ve managed to save up $1,000. That might not seem like much on its face, especially when there are so many millionaires around. The temptation might come around to invest that money in the stock market immediately to get some hefty returns and start compound interest working in your favor. However, it might be a good idea to hold up for a minute and think about where that money should go.
Avoid The Stock Market
If $1,000 is all you have to your name, the stock market is probably not the best place to put it. There are ups and downs, and these swings can be stressful for those who’ve never weathered a recession. At the first sign of trouble, there will likely be a temptation to sell. In this instance, your $1,000 could easily become $500 or $600. It might even become less if you’ve attempted to purchase a single stock and hit a home run. Individual stocks can and do go to $0 in value on a regular basis.
Pay Off Debt
While it can be hard to build wealth, it’s easy to get into debt. Banks frequently target young adults with credit card applications. The cards have really low minimum payments associated with them, and many young folks think that they can handle them with no problem. However, the higher the overall balance gets, the higher the level of interest that will have to be paid.
Over time, even a few thousand dollars in debt can lead to a few thousand in interest payments because of the rates that the banks charge on credit cards. Therefore, a good investment for that $1,000 would be paying off any debts you’ve accumulated. Many credit cards come with 15- or 20-percent interest rates. By paying down the principle, you’ll earn a return that equals your interest rate. That return will likely beat the stock market in most years.
If you have no debt, the best way to invest $1,000 in cold, hard cash is just leaving it in savings. In the past couple of years, interest rates have gone up, which means that it’s possible to earn a few bucks on that money through a high-yield savings account or a money market account. As long as the account is FDIC insured, there is no risk of losing the money.
You might wonder why it’s a good idea to leave $1,000 in an account that earns 2 percent a year. It’s because cash provides flexibility. According to the Federal Reserve, about 40 percent of Americans could not handle a $400 emergency without experiencing serious hardship. Having $1,000 in savings would allow you to take care of such an emergency without having to sell something or without going into debt. You’d still have a bit of money left over to start building upon.
Hitting your first $1,000 should be a cause for celebration. It means you have a bit of cash between you and complete destitution. The stock market comes with risks, so it’s a good idea to hold off on investing in the market until you’ve built up a bit more in savings. Slow and steady tends to win the race, and being conservative in the beginning can lead to a solid financial foundation.