A lot of people assume that millionaires become millionaires by investing in the stock market. But in my experience, that’s not the case. Millionaires become millionaires by practicing wealthy habits.
Building wealth and becoming financially independent isn’t primarily about investing in the stock market. It’s about building habits that will make you wealthy over time, no matter how the stock market performs. In time, you’ll invest in the stock market. Maybe that time is now.
But don’t start throwing money into the market until you’ve established wealth-building habits.
There are a few wealth-building milestones that you should celebrate before you think about investing in the stock market:
- Pay all your bills on time every month.
- Eliminate your high-interest debt (including those pesky student loans).
- Hold a cash buffer for life’s emergencies.
- Buy life insurance if you have dependents.
The nature of investing in the stock market makes these habits extremely important. In the long run, cash loses value due to inflation. If inflation grows by three percent each year, money will lose half of its value in 24 years. That means that $10,000 in the bank right now will be worth today’s equivalent of $5,000 in 24 years.
So, Should I Invest in the Stock Market?
In the long run, you have to invest in something that will outpace inflation. However, in the short term, you need to get your financial house in order. Stock market portfolios fluctuate in value. They move up, and they move down. If you depend on returns from the stock market to fund your lifestyle, you’ll be sorely disappointed.
Having wealthy habits in place helps you build up a stomach for risk. We will do what we can to teach you to see “higher highs and higher lows,” but you might make some mistakes. Practicing good money habits provides an excellent backstop against bad investing.
Once you’ve checked off those milestones, should you start investing in the stock market? Maybe. But I add one further controversial item to the list:
If you must pick between investing in yourself and investing in the stock market, pick yourself.
Investing in Yourself vs. Investing in the Stock Market
What do I mean by investing in yourself? I don’t mean adding useless letters to the end of your name. I don’t mean “investing” in massages, meditation apps, or world travel. Investing in yourself means spending money that will help you to grow a business, or to position yourself as an authority in your career.
Most wealthy people get wealthy first — then they invest in the stock market to stay wealthy. I advise you to do likewise.
Today, you can start investing in the stock market for as little as $5 with the help of apps like Stash. But that same $5 could buy a month or more of hosting from BlueHost. You could buy a URL from GoDaddy for about a buck. For about $100, you can start a website in your chosen career field.
Three years ago, I spent $26 in gas money to attend a conference. That conference launched me into a writing career that has allowed me to build it to a $60,000-plus annual income with 12 to 15 hours of work each week. That’s an impressive return on investment.
What if I’d invested that $26 in the stock market instead? Today, it would be worth about $33. And we're in the middle of a bull market. A bear market would have dropped my investment to $18 or less. Obviously, spending $26 on a conference was a much better investment than putting $26 in the stock market.
I’m hardly alone in seeing those kinds of results. Your investment in yourself can help you achieve these types of returns, too. It can bring you lucrative job offers and side hustle opportunities. Those jobs and opportunities could double or triple your income.
Meanwhile, an impressive bull market run could turn $100 into $400 — if you leave it there for a decade. Investing in yourself tends to be much more profitable.
People with wealthy habits can invest in themselves and in the stock market. The year that I spent $26 on a conference, I also invested several thousand dollars in the stock market. I didn’t have to choose. However, if you must choose, always invest in yourself first.
This is the second installment of a multi-part series that is published every Wednesday. To see Hannah Rounds' first piece on the stock market, click here.