If you pay attention to financial news, you probably know that Bitcoin is the largest cryptocurrency by market value. You probably also know that it made waves recently by reaching a new record of over $68,000 in early November. What’s more, the second-largest cryptocurrency, Ether, also hit an all-time high of over $4,857. These are just two recent examples of how the cryptocurrency market is reaching new milestones, and it’s definitely catching investor attention.
If you’re feeling tempted to enter the crypto market now, keep in mind that the excitement of this sector also comes with volatility and risk. So, if you’re going to invest in crypto, make sure you only invest an amount you can afford to lose.
Calculating Your Investment
If your financial health is unstable – or if you simply haven’t been paying it much attention – you should assess your finances before investing in any riskier asset class. Most importantly, you’ll want to be sure you’re funding all your required “buckets” first. Any money you invest in cryptocurrency should come from excess cash flow, rather than at the expense of some other, key area of your finances.
Now, the exact amount you can afford to put in crypto will vary based on your unique circumstances. However, you can begin to get to that number by examining four key areas of your finances and answering the following questions.
Do You Have High-Interest Debt?
If you’re carrying credit card debt, personal loans, or other high-interest debt, these should be your first priorities. If you have extra cash, your best strategy is to use it to pay down your debt, rather than investing it in crypto. The reason is that when left unpaid, high-interest debt compounds and can easily overwhelm your finances.
At the moment, credit card interest rates are averaging about 16% and the average American carries a balance of $5,525. If you’re carrying over a balance from month to month – and accumulating interest charges – it’s a smarter financial move to put any extra cash against that debt, rather than investing in crypto right now.
Are You Maximizing Your Retirement Accounts?
Maybe you don’t have high-interest debt, but you’re leaving money on the table with your retirement plan contributions. It is essential to contribute to your 401(k) or 403(b) up to your employer match, so do your research and ensure you’re at least meeting that threshold, if not maxing out your contributions up to the legal limit. If you’re missing out on your employer match, you’re giving up free money. If
you’re contributing less than the allowable amount to your retirement accounts, you won’t be able to maximize growth and let your money earn more for you. Think about diversifying your retirement investment accounts, too, by contributing pre-tax dollars into your 401(k) or 403(b) and also contributing post-tax dollars to a Roth IRA that you won’t pay any taxes on when you withdraw in retirement.
Is Your Emergency Fund Solid?
Another question to ask yourself before investing your extra cash into cryptocurrencies is whether you’ve established an emergency fund. Most financial professionals recommend building a fund that could cover three to six months of your expenses, even if you lost all your income. The COVID-19 pandemic showed all of us that we never know what might be just around the corner – and that our financial circumstances could change quickly – so be sure you’re ready for a rainy day before you invest your cash in crypto.
Are You Underfunding Any Other Big Goals?
Let’s say you’ve tackled any high-interest debt, you’re consistently funding your retirement accounts, and you’ve saved for a rainy day. The next thing to assess is whether you could better fund any other important goals. This could be something like saving to send your kids to college or staying on track to pay off your mortgage early. Think about your goals for the next three years and consider whether your extra cash could make more of an impact there than it could with cryptocurrency investment.
Making the Jump into Crypto
The above questions aren’t designed to kill your crypto dreams – but they are designed to help you determine when to invest and how much. If your reason for wanting to get into the crypto market right now is based on a fear of missing out, these questions can help bring you back to reality. And while you may have dreams of big gains, it’s important to remember that there’s always the chance you’ll suffer big losses, too. So, take your first steps toward crypto with clarity about your financial health.
Crypto Consulting: About Arbor Digital
Arbor Digital is a team of passionate professionals dedicated to responsibly constructing and managing digital asset portfolios by continually evaluating blockchain projects with potential. Our mission is to be the connection for Registered Investment Advisors and their clients to the world of digital assets and to educate them about the disruptive power of blockchain technology within financial services.
To learn more and find out how you can #getoffzero visit https://arbordigital.io/ to book a demo or subscribe to our weekly Digital Asset Roundup.
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