So you’ve learned the basics of the stock market and how to invest in them. Every other person you come across is investing and they are suggesting you do the same, but one very important step in growing wealth that is sometimes overlooked is that you should:
Build a sense of stability first before actually growing wealth.
This stability comes in two steps:
- Having a moderate sum of money in your bank account, say, $20,000
- Maintaining a feeling of stability knowing that $20,000 is available to you at all times
Why and how is this relevant, you ask?
The stock market can be volatile, meaning that whatever it is you invest in can go up and down in value unpredictably.
If you are leaving very little in your bank account and you are keeping most of your savings in your investment accounts...
You’re likely going to worry.
Every so often you’re going to worry about how the stock market is performing. You’re going to worry whether you have picked out the right investments. You’re going to worry about whether or not you should sell your investments. You’re going to worry about the downswings in the stock market. You might panic sell and panic buy.
This is because you are growing wealth from a position of fear rather than stability.
Why invest if you can't sleep at night?
This fear comes because you are keeping most of your money, that you have possibly worked hard for, in the stock market, where you have very little control.
If all you have is $50,000, and you invest it all in the stock market, you'd probably be terrified when it goes down to $40,000. You might panic sell and lock in your fate of losing $10,000 because you're afraid of losing anything more. But if you wait another year, maybe it could go up instead to $55,000.
So how do you stop yourself from having this fear and worry, and from panic selling?
By keeping your first $20,000 untouched and uninvested.
This is what's usually called an emergency fund. Now, you may be more comfortable having more or less than $20,000 as your emergency fund, but it's generally a good number as it's around 3–6 months' worth of expenses for an everyday investor.
When you know you have access to this fund at all times, you build a mental cushion of stability that will help you withstand the ups and downs in the stock market. You'll worry less, because the stock market isn't the end-all-be-all for you. You have a backup fund.
When rooted in stability, you can grow wealth in a healthier mindset.
You'd no longer have excessive fear of the ups and downs in the stock market. You'd let your investment do its own thing, without panic selling and panic buying. You'd feel fuller, stronger, and more confident in your decision-making as you have a mental cushion that supports your financial moves in your day-to-day life.
Build your emergency fund first, and then invest.
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