How to calculate what you can afford to invest in crypto like BTC, ETH

Bitcoin, the largest cryptocurrency by market value, hit a new record high of over $ 68,000 on Tuesday. It is now trading at around $ 67,419, according to Coin Metrics.

Additionally, Ether, the second largest cryptocurrency, which is native to the Ethereum blockchain, also hit a record high of over $ 4,857. It is now trading at around $ 4,769.

Overall, the cryptocurrency market is now worth over $ 3 trillion, which is an exciting step for the industry.

With all the hype, investors may be tempted to buy for fear of missing out. But financial experts warn that cryptocurrencies are volatile and risky investments, and you should only invest what you can afford to lose.

“In order to determine how much you can put into a riskier asset class, it is important to first assess your own financial health and ensure that you are funding the required compartments first”, Anjali Jariwala, Financial Planner chartered, chartered accountant and founder of Fit Advisors, told CNBC Make It.

You should only consider investing in a riskier asset class, like cryptocurrency, once there are “no more funds to fund and you still have cash flow. surplus, ”she said.

While the specific amount you can afford to invest in cryptocurrency differs from person to person, Jariwala recommends budgeting a few key things first.

High interest rate debt

Your first priority should be paying off high-interest debt, like credit cards and personal loans, says Jariwala. If it is not paid, the debt will get worse and can become difficult and overwhelming to pay off.

The average credit card interest rate is currently over 16%. And although many Americans reduced their credit card balances during the pandemic, the average balance is still $ 5,525, according to Experian data, with more than half of active accounts carrying over their balances each month.

Retirement

While you’re paying off your high-interest debt, consider contributing your 401 (k) up to any employer, Jariwala says. “Matching with the employer is ‘free’ money, so it’s important to take advantage of it,” she explains.

She also recommends diversifying your retirement investments by putting pre-tax money in a 401 (k) and after-tax money in a Roth IRA.

With a traditional 401 (k), contributions are made in pre-tax dollars. This means that all the money you invest comes directly from your paycheck, which reduces your taxable income for the year. With a Roth IRA, you invest money that has already been taxed. When you withdraw it in retirement, you get the tax-free earnings, assuming you meet the withdrawal requirements.

Emergency fund

Once you’ve paid off your debts and saved for retirement, “build your emergency fund if you haven’t already,” Jariwala says.

She usually recommends saving three to six months of expenses, but this amount depends heavily on your personal situation.

To determine how much you should have in an emergency fund, start by adding up all of your necessary monthly expenses, including rent, food, bills, loan payments, and insurance. Then multiply that total by the number of months you want your fund to cover.

Various

Once you have funded all of these compartments, “take a look at your personal finances and determine if there are any other compartments that need funding,” Jariwala says. This can include education funds for children, a down payment on a new home, home renovations and more.

“It’s important to think not just about the year ahead, but the next three to five years,” she says.

After you’ve allocated your income to the above expenses, as well as your daily expenses, you can look at what’s left and figure out how much money you can afford to invest in a riskier asset class like crypto. cash.

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