Bitcoin, the largest cryptocurrency by market value, reached a new record over $ 68,000 on Tuesday. It is now trading at around $ 67,419, according to Coin Metrics.
What's more, ether, the second largest cryptocurrency, which is native to the Ethereum blockchain, also reached an all-time high over $ 4,857. It is now trading at around $ 4,769.
In general, the cryptocurrency market is now worth over $ 3 trillion, which is an exciting milestone for the sector.
With all the hype, investors may be tempted to buy the fear of getting lost. But financial experts warn that cryptocurrencies are volatile and risky investments, and that you should only invest what you can afford to lose.
"To determine how much can be placed in a higher risk asset class, it is important to first assess your own financial health and make sure to fund the required cubes first," Anjali Jariwala, Certified Financial Planner, Certified Public Accountant, and Founder of Fit Advisorshe tells CNBC Make It.
You should only consider investing in a higher risk asset class, such as cryptocurrency, once "there are no other deposits to fund and you still have excess cash flow," he says.
Although the specific amount you can afford to invest in crypto will differ from person to person, Jariwala recommends budgeting for a few key items first.
High interest debt
Your first priority should be paying off high-interest debts like credit cards and personal loans, Jariwala says. If it is not paid, the debt will escalate and can become difficult and overwhelming to pay.
The average credit card interest rate is currently more than 16%. And even though many Americans reduced their credit card balances during the pandemic, the average balance is still $ 5,525. Experian data sample, with more than half of active accounts accumulating their balances each month.
Retirement
While you're paying off your high-interest debt, consider contributing to your 401 (k) at the height of any employer, says Jariwala. "The employer contribution is 'free' money, so it is important to take advantage of this," he explains.
He also recommends diversifying your investments for retirement putting up pre-tax money in a 401 (k) and after-tax money in a Roth IRA account.
With a traditional 401 (k) plan, contributions are made in pre-tax dollars. This means that all the money you put in comes directly from your paycheck, reducing 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 earnings tax-free, assuming you meet the retirement requirements.
Emergency fund
Once you've tackled your debt payments and are saving for retirement, "build up your emergency fund if you haven't already," says Jariwala.
He generally recommends saving three to six months on expenses, but this amount highly depends on your personal situation.
To determine how much you should have in an emergency fund, start with adding up all your necessary monthly expenses, including rent, food, bills, loan repayments, and insurance. Then multiply that total by the number of months you want your fund to cover.
Diverse
Once you've funded all of these groups, "check your personal finances and determine if there are other groups that need funding," says Jariwala. This can include funds for children's education, a down payment on a new home, home renovations, and more.
"It is important to think not only about next year, but also about the next three to five years," he says.
After mapping your income to the above expenses, along with your day-to-day living expenses, you can see what's left and determine how much money you can afford to invest in a riskier asset class like cryptocurrency.
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