This is the second installment of Stock Market for Beginners, our six-part series on investing and the stock market. You can read the previous piece, What Is the Stock Market?, here.

Many people assume that millionaires become millionaires by investing in the stock market. But that’s not always the case. Many millionaires become millionaires by practicing healthy money habits.

About 62 percent of Americans expect investments in individual stocks or stock funds to be a major source of their retirement income, according to a recent Gallup poll. But building wealth and becoming financially independent is about practices that will make you wealthy over time, no matter how the stock market performs.

At some point, you may invest in the stock market. Maybe that time is now.

But don’t start throwing money into the market until you’ve established healthy financial habits.

Wealth-Building Milestones

There are a few wealth-building milestones that you should celebrate before you begin investing in the stock market:

  • Pay all your bills on time every month, consistently.
  • Reduce or eliminate your high-interest debt (including those pesky student loans), depending on your cost-benefit analysis of investing versus paying off debt.
  • Hold a cash buffer for life’s emergencies, ideally three to six months’ worth of living expenses.
  • 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 sitting in a low-interest rate account loses value due to inflation. That means that money in the bank right now will be able to purchase less in the future. 

Of course, not all financial advisors are aligned on the right moment to start investing. For example, some might suggest building your emergency fund and starting a sound investing plan simultaneously.

Also, you will likely carry some sort of debt throughout your life. Just because you are paying off a mortgage doesn’t mean you shouldn’t invest. What matters is that you understand your debts and assets and you have a plan. 

So, Should I Invest in the Stock Market?

In general, you should invest in something that will outpace inflation. More than half of all American households choose to invest in the stock market, according to Pew Research.

Yet only 34 percent of survey respondents were able to answer four out of five basic financial literacy questions correctly on FINRA’s National Financial Capability Study. In the short term, you need to get your financial house in order. 

Investing is a long-term strategy of growing your money using carefully selected investments. Another common strategy — day-trading — is attempting to produce short-term returns by timing day-to-day movements within the market, which can be risky.

“Day-trading is gambling in disguise and can lead to significant financial losses,” says Brian Fry, a certified financial planner and founder of Safe Landing Financial.

“Day-traders should only risk money they can afford to lose, as it’s impossible to consistently time the market,” Fry adds. “To succeed in timing the market, day-traders need to succeed in choosing when to buy and sell, which can be stressful.”

Having healthy money habits will help you build a solid financial foundation before you begin to assume any investment risk. Financial advisors can do their best 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 poor investing.

Keep in mind: Not every asset you invest in will be a winner, even if all the market fundamentals are sound. The idea is to have more winners than losers over time. And remember when market volatility happens to sit tight.

Stock market portfolios tend to fluctuate in value.

Once you’ve checked off these milestones, should you start investing in the stock market? Maybe. But I’ll add one further controversial item to the list:

If you must choose between investing in yourself and investing in the stock market, there is not one right answer, so weigh your options carefully.

Investing in Yourself vs. Investing in the Stock Market

What do I mean by investing in yourself? I don’t just mean adding letters to the end of your name by getting an extra degree, and 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. This may be achieved by going back to school, but it can also be achieved through other means.

“Whenever a client asks me what I think they should do with their capital, my response is always to ask them to clarify their financial goals,” says Bryce Welker, a certified public accountant and founder of CPA Exam Guy.

If you are satisfied with your career, and are looking for passive income, then the stock market may be a better bet and is less work than investing in your career or a small business. Your goal is to do as little as possible for those capital gains, he adds.

“If your goal is more long term and has both an income and a life satisfaction component, then attending a conference or starting a small business might be a better option [than investing],” Welker says. “Remember that starting a business is riskier than investing in a career that is already going well for you, so factor that into your risk tolerance.”

Today, you can start investing in the stock market for free with the help of apps like Acorns. But money spent investing in stocks could pay for a month or more of web hosting. You could buy a URL from GoDaddy for just a dollar. For about $100, you can start a website in your chosen career field or in ecommerce.

Three years ago, I spent $26 on 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. Not a bad return on investment.

Like anything in life, there is no right or wrong answer, but it’s important to think about how to make your money work for you in both the short and long term.

I’m hardly alone in seeing those kinds of results. Your investment in yourself can help you achieve healthy returns, too. It can lead to lucrative job offers and side hustle opportunities — which could double or triple your income.

Meanwhile, an impressive bull market run could significantly increase your return on investment.

Though 35 percent of Americans view real estate investments as the best long-term investment, according to a Gallup poll, stocks have historically outperformed real estate over longer investment time frames.

The average overall return in the stock market is 9.2 percent annually, according to the Federal Reserve’s Financial Stability Report, which outpaces real estate returns by 3.5 percent.

The Bottom Line

People with healthy money habits can invest in themselves and in the stock market. There’s no need to choose one or the other. The year that I spent $26 to attend a conference, I also invested several thousand dollars in the stock market. I didn’t have to choose. That’s the best situation of all.

If you can afford to invest in the market and in your personal or professional life, don’t choose one or the other. Investing in yourself will give you the opportunity to increase your stock investments, while continuing the growth of your assets and personal accomplishments.

This is the second installment of Stock Market for Beginners, our six-part series on investing and the stock market. To read the next piece, Do I Need a Financial Advisor?, click here.

Additional reporting by Ellie Schmitt and Lukas Shayo

Past performance is not a predictor of future results. Individual investment results may vary. All investing involves risk of loss.

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