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If you’re sitting on some extra cash right now, consider yourself lucky. Between job losses and market crashes, there are a lot of people who can’t say that this year.Â
You obviously want to hold onto your money and even grow it if you can, so you may be thinking about investing your funds. Now can be a great time to do this, but it depends on your financial situation and investing style. If any of the signs below apply to you, you’re better off keeping your extra cash out of the stock market for now.
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1. You don’t have any emergency savings
An emergency fund is essential for long-term financial security. Without one, a job loss or other financial crisis could leave you without a way to pay your bills. You might have to take on costly credit card debt or else risk ruining your credit, and that can seriously hurt your ability to save and invest for your future. If you don’t have an emergency fund already, building one should be a higher priority than investing.
It’s not a good idea to invest your emergency fund because the stock market can be volatile in the short term. You might be forced to sell when your investments are down and end up costing yourself money. So keep your emergency fund in a savings account where you have easy access to it at all times. Aim for three months of living expenses to start — six months is even better.
2. You don’t have a steady source of income
Tens of millions of people were laid off due to the pandemic. Many have lost their jobs for good. Others are concerned about possibly losing their jobs in the future. If you fall into any of these groups, it doesn’t hurt to pad your emergency fund even more, especially if you worry about your ability to find a new job.Â
Again, you don’t want to invest these funds because you never know when you might need them. Stick to a high-yield savings account. You can find these with many online banks. They offer higher interest rates than you can find with savings accounts at traditional brick-and-mortar banks.
3. You are prone to making emotional investing decisions
We’re in the middle of yet another market crash, so a lot of people are watching their investments tumble right now. It can be stressful, especially for older adults who depend upon their investment income to cover their living expenses. You might be tempted to sell off investments that have performed poorly recently, but this could cost you in the long run.
If you’ve invested in well-established companies that have been around for decades, chances are, they will survive the recession and their stocks will eventually rebound. When that happens, you will also see your investments rise in value again. If you sell them off because you’re afraid of losing more money right now, you might never be able to take advantage of the long-term gains you could get by sticking it out.
4. You’re hoping to get rich quick
On the other end of the spectrum, there are those who think they can make a quick buck by investing a lot when they think the market has hit bottom or buying a lot of stock in a company that’s doing well amid the recession. It’s not that those strategies can’t work. It’s just that they’re not guaranteed. If you guess wrong, you could end up costing yourself a lot of money.
Before you invest, you should ask yourself why you’re choosing to invest it in a particular company or mutual fund. It’s fine to do so if you think it will earn you money in the long run, but you should be able to explain why you believe that investment will do well in time. If your only rationale is its performance over the last couple of months, that’s probably not a good enough reason to sink all of your savings into it.
5. You have a lot of debt
You can invest and pay off debt at the same time, but the way you handle it should depend in part on what kind of debt you have. High-interest debt, like credit card debt, can cost you far more than what you’ll probably earn on your investments, so it makes more sense to put your extra cash toward paying it off before you invest more money.Â
A recession is a time to use extra caution when it comes to your money, but the above rules should always apply. You need to make sure your day-to-day expenses are taken care of first, and you must also make sure that you’re not making impulsive, emotional investing decisions that could come back to haunt you later. Once you’ve done those two things, you can feel good about your decision to invest.
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