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 glossed over is that you should:
Build a sense of stability first before actually growing wealth.
This stability comes in two successive steps:
- Having a moderate sum of money in your bank account, say, $20,000
- Having 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 at times, especially when viewed through a short-term lens. 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 downtime in the market. You might panic sell and panic buy.
This is because you are growing wealth from a position of fear rather than stability.
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. We know that panic selling and panic buying aren’t good strategies to take in the stock market because it is a long-term game.
So how should you mitigate this feeling of fear and worry?
By keeping your first $20,000 untouched and uninvested. This money will serve not only as an emergency fund, but also as a “stability fund” that provides you with a mental cushion of stability. This amount may vary amongst different people, but I personally think $20,000 is a good amount as it is equivalent to several months’ worth of salary for an everyday investor, and it can also help cover a small- to medium-sized emergency. You can allocate these funds across a High-Interest Savings Account, a chequing account, or even some into a short- to medium-term fixed deposit for a slightly higher return compared to a regular bank account. Essentially, the principle is having a stability fund that you know you can access at any time.
Read More: What Is a Stability Fund?
When rooted in stability, you can grow wealth in a healthier mindset.
A stability fund affects your daily life in your approach toward money. You feel fuller, stronger, and more confident in your decision-making as you have a financial cushion that supports you mentally at the back of your head.
You are also able to take a more calculated risk.
The stock market isn’t the riskiest thing in the world, but there is some amount of willingness needed to embrace the risk involved in investing in it.
A stability fund helps you let go of your money to ride the ups and downs in the stock market.
The ability to let go of your money and do its thing in the stock market is an important skill to have so that you can hopefully cash out on top in years to come. This is comparatively better than the idea of clutching to your money so tightly that a downswing in the stock market suffocates you and you can’t help but anxiously check the performances of your stocks again and again, leading to panic buys and panic sells.
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