Please ensure Javascript is enabled for purposes of website accessibility

Almost 30% of Americans Aren't Ready to Invest Yet

By Christy Bieber – Oct 14, 2020 at 7:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are you one of them?

Investing money in equities is critical if you want to build wealth. That's because the stock market has historically provided the best balance between risk and potential returns, enabling investors to put their money to work for them in a smart way. 

But while everyone should invest money throughout their life, that doesn't necessarily mean everyone should be investing right now. In fact, around 30% of Americans really shouldn't be putting much -- if any -- money into the stock market. And there's one simple reason why.

Smiling woman putting money into piggy bank.

Image source: Getty Images.

Here's why so many Americans aren't ready to invest

It's because they're lacking an emergency fund. A recent study conducted by the Transamerica Center for Retirement Studies revealed that 31% of women and 28% of men have less than $5,000 saved for emergencies. Most experts recommend having enough liquid savings to cover three to six months of living expenses. The millions of Americans with less than $5,000 saved are falling far short of that.

Unfortunately, investing money before you have emergency savings could put you in a tough spot when surprise expenses come up, as they inevitably will. You might have to choose between going into debt or selling your investments, potentially at a loss, in order to cover your surprise costs. And if you're forced to borrow at a high interest rate, that could affect your ability to save and invest later, because you're committing a portion of your future income to creditors. 

Investing without emergency savings is always a high-risk proposition, but with the coronavirus pandemic and the 2020 recession increasing volatility in the market, it's an especially bad time to take this chance. A quick look at the recent performance of the stock market shows the potential problem: The market crashed in March and while it quickly recovered over the next few weeks, if you'd been forced to sell investments during the downturn because you lost your job and needed the money to live on, you might have locked in big losses and missed out on the recovery entirely. 

Rather than taking the chance of being forced to sell your investments at an inopportune time in an unsafe market, it's a good idea to put your extra cash toward saving for emergencies before investing it. Of course, the one possible exception to this is if you're getting a 401(k) match from your employer, as by passing up the match you're giving away free money.

If you have an employer match, you may decide to contribute just enough to earn it while putting the rest of your spare money into saving for emergencies -- but you need to consider the very real risks before making your choice. In some cases, it's still a good idea to prioritize emergency savings even if it means giving up the match -- especially if your job is high risk and you have no other money to rely on if something happens. Investing money in a retirement account with no emergency savings can be an especially dangerous strategy under most circumstances, as you could face early withdrawal penalties if you're forced to tap your retirement savings early (although this penalty is suspended this year for hardship withdrawals of up to $100,000 made due to COVID-19).

And for those without an employer match, building up your emergency savings before investing is pretty much always the best course of action. If that's your situation, get serious about saving for emergencies before considering putting cash into the stock market. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.