Investing can feel pretty scary right now with all the chatter about a looming recession. Beginners especially may wonder if now's a safe time to be investing, and the truth is, that depends. Investing is a great way to grow your wealth, but you need to check the following three boxes before you start.
1. You have an emergency fund
Emergency funds are crucial to investing success because they enable you to leave your investments alone until you're ready to sell them. When you don't have emergency savings, you may have no choice other than to sell your investments, possibly at a loss, when unexpected costs arise in order to avoid taking on debt.
You should keep at least three months of living expenses in a high-yield savings account for your emergency fund. Some people feel more comfortable saving six or 12 months of living expenses. That's up to you. You may need to adjust how much you keep in your emergency fund as your budget changes over time, and if you spend any of it, you'll need to set aside some cash to replenish it so you're ready for the next emergency.
2. You have money you don't plan to spend in the next five to seven years
It's also not wise to spend money you plan to spend within the next several years because the stock market can be pretty volatile in the short term. While there's a good chance you can grow your wealth over several decades, this is less certain if you're only investing for short periods of time.
Keep money you're saving for near-term purchases, like a car or home, in a savings account. This way, you won't have to worry about losing money, and you'll have access to your funds when you need them. Some online savings accounts even enable you to put your money in different digital envelopes, so you can separate your funds for each of your personal goals.
3. You have a strategy to help you avoid emotional decisions
Watching your portfolio's value tumble isn't an easy thing to do, which is why many experienced investors try not to pay too much attention to their investments' daily movements. This helps them avoid the temptation to buy or sell based on recent performance. If you're investing for the long term, these short-term fluctuations don't matter much anyway.
Once you've got your money invested and you're confident that you're sufficiently diversified, avoid checking your portfolio more than once every few months. See if you can set up automatic contributions so you don't have to look at your balance every time you want to add more money to your account. Many taxable brokerage accounts and even some retirement accounts enable you to enter your bank routing and account numbers and set up automatic transfers on a schedule.
Are you ready to get started?
Growing your wealth through investing is rarely a linear process, but it can pay off in a big way in the long run. So once you've checked these boxes, don't be afraid to dive in.
If you're new to investing, an index fund is a great place to begin. This is a bundle of stocks that mimics the performance of its target market index. They're pretty affordable, and they offer instant diversification. Many also have historically strong returns.
To get started, you could first choose the index you're interested in. The S&P 500 is a smart choice for many beginners. It contains 500 of the largest companies in the United States, including top performers across several market sectors. Then, you have to look for a fund based on that index. It will often have the name of the index in the fund name.
You may want to compare a few index funds before choosing one. Look at their historic performance and expense ratios. These are annual fees written as a percentage of your assets. For example, a 0.03% expense ratio means you'll owe the fund manager 0.03% of your assets invested in the fund every year.
Once you've chosen a fund, all you have to do is invest your money or set up an automatic contribution schedule and wait. It will take some time, and there's a chance you could lose money in the short term, but stay the course and focus on the long-term growth potential.