4 Signs You're Ready to Start Investing
Investing money for your future is essential -- but are you ready to start investing? These four signs suggest you are. Image source: Getty Images.
If you want to build your wealth, you need to invest your money. Putting money under the mattress or in a savings account that pays no interest isn't going to work for the long-term because your money is constantly losing value thanks to inflation. Instead, you need to invest your money into assets that produce a good return on investment so your money can grow.
So, when should you start investing? For most people, the answer is as soon as possible. This is especially true if your employer offers a 401(k) and matches contributions you make.
But while you could miss out in big ways if you delay investing, you also need to make sure you have at least some of your financial ducks in a row first. If you're not sure if you're ready, consider these four signs that it's time to start investing.
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1. Your high interest debt is paid off
If you invest in the stock market, it's reasonable to expect returns of around 7% to 8%. While this is a good return on investment over time, it's nowhere near the interest charged on high interest debt such as payday loans, car title loans, or even some credit cards.
Because you'll pay far more in interest than you'll earn in returns when you invest, it usually makes sense to pay off high-interest debt before you begin investing spare cash. This is especially true if you have payday or car title loans that often have APRs of 300% or more.
If you have high-interest debt, make a plan to pay it off ASAP. Choose either the debt snowball or debt avalanche method and put as much extra cash as you can towards your debt. If you are committed to paying it off quickly, you can wait to start investing until your debt is gone.
2. You have some money set aside for emergencies
While investing in a diversified mix of assets in the stock market is likely to produce good returns over time, the key phrase in this sentence is over time.
The stock market has ups and downs and you need to be able to keep your money invested for the long haul to weather market downturns. That means you shouldn't invest money in the market if you plan to need it within around five years.
You're bound to have unexpected expenses sometime in the next five years that you need to pay -- and you should have money available to pay them without going into debt or pulling your money out of the market. That means building an emergency fund you can access any time.
Ideally, your emergency fund should cover three to six months of living expenses. But, you may not necessarily want to wait to invest until you have that much money saved for emergencies, as that could take months or even years depending on your savings rate.
Instead, you may want to build a “baby” emergency fund with around $1,000 or $2,500. Then, split your spare cash among your emergency fund and long-term investments until you've saved up several months of living expenses.
3. You have at least a little bit of spare cash to invest
You can't invest if you don't have any money available to you once you've paid your required bills.
And, you may not want to invest very small amounts of money because the commission (fees you pay for buying and selling assets) could eat up any profits if you don't buy enough of the asset. It doesn't make sense, for example, to buy one share of a $20 stock you'd pay $5 in commission to buy and another $5 in commission to sell. Your investment would have to earn $10 for you just to break even.
The good news is, you have options even if you don't have a ton of money. Robo-advisors such as Betterment allow you to contribute as little as $10 per investment. These robo-advisors invest your money for you in an appropriate mix of assets and you'll pay a very small fee. If you're hoping to get started with a tiny amount of money, a service like this could help you get into the market sooner even with a very low initial investment.
Of course, the more spare cash you have, the more your money will grow. Try setting a budget that prioritizes savings and cuts expenditures elsewhere. The goal should be to work up to investing around 15% of your income if you hope to build financial security.
4. You understand the basics of how to invest
You don't need to be Warren Buffett to start investing, but you do need to understand some basics about assets you could invest in. You should understand what a stock is (an ownership share in a company) and what ETFs and mutual funds are (funds that allow you to gain exposure to many different assets by pooling your money with others).
Picking individual stocks is often too complicated for beginning investors, but ETFs and mutual funds make it easy to build a diversified portfolio where your money is invested in lots of different things. This is important because if one particular asset performs poorly, your entire portfolio won't be decimated because of it.
You also should make sure you understand exactly what fees you're being charged for your investment and how the investment is supposed to make money.
Are you ready to get started?
Now you know some of the key factors to consider when deciding if you're ready to invest. Hopefully, you'll find that you've checked off these boxes and can get your money invested in some assets so you can begin putting it to work for you.
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