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5 Ways to Know When You Should Start Investing

Hesitant about becoming an investor? Learn five ways to know for sure when you’re ready to invest. Read on for a clear plan to prepare your finances and mindset to start investing, no matter how much or little money you have.

By
Laura Adams, MBA,
May 9, 2018
Episode #543

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5 Ways to Know When You’re Ready to Start Investing

Sya W. says, “In a couple of months I’ll be 19 and starting college. I work my tail off and still don’t bring home enough money. But even though I’m completely new to investing and know I’m not just going to 'get rich quick,' I want to create a good future for myself over the long term.

My main concern about investing in the stock market is being too young, because I’m bound to make mistakes. Do you think it’s too soon for me to invest or should I just go for it?”

Thanks for your question, Sya! I love that you’re thinking about your future at a young age and asking the right questions. Being curious and seeking knowledge is fundamental for achieving success, so I’m certain that there’s an amazing future ahead of you.

Starting early allows your money to compound and grow exponentially over time—even if you don’t have much to invest. So, my advice is to always start investing as early as possible. However, there are some key financial priorities and tasks that you should accomplish first.

In this post, I’ll cover five ways to know when you’re ready to invest. You’ll come away with a clear plan to prepare your finances and mindset, no matter how much or little money you have.

5 Ways to Know When You Should Start Investing

  1. You have emergency savings. 
  2. You have key insurance coverage. 
  3. You don’t have any dangerous debts. 
  4. You want money to grow over the long term. 
  5. You opened a retirement account.

Here’s more detail about each of the five ways to know when you’re ready to start investing.

See also: 7 Micro Habits That Create Financial Success

1. You have emergency savings.

Before you begin investing, your first financial priority should be accumulating some amount of emergency savings. Having a cash reserve is never a luxury, it’s a fundamental safety net that you should never go without.

Having a cash reserve is never a luxury, it’s a fundamental safety net that you should never go without.

Life is full of surprises and many of them drain your bank account! So before spending a dime on investments, ask yourself if you’re really prepared for the unexpected. In an instant, you could lose your job, see your business income dry up, get a serious illness, or experience a natural disaster. It’s not fun to think about these types of devastating situations, but they happen.

While no amount of money can reverse a tragedy, having a financial safety net can make it so much easier to cope. What you need depends on factors such as your living expenses, debt payments, income, and whether you have dependents.

At a minimum, strive to maintain an emergency fund equal to three to six months’ worth of your living expenses. For instance, if you spend $3,000 a month on essentials (such as housing, utilities, food, and debt payments), make a goal to keep at least three times that amount, or $9,000, in an FDIC-insured bank savings account.

You might set aside 5% or 10% of your gross pay or have $25 from each paycheck direct deposited into a savings account until you have a healthy cash cushion to land on if you’re faced with financial emergency.

If accumulating that much money seems out of reach, don’t worry. Just get started with a small goal, such as saving $500, then $1,000, until you have at least one month’s worth of security on hand.

Having even a small cash reserve is better than nothing because it can keep you from going into debt in the first place if you hit a rough financial patch (and who hasn’t?). Then continue building your emergency fund while you invest for the future at the same time.

A common question is whether you should invest your savings since the interest paid on a bank account is so low. The answer is almost always no, unless you have more than enough cash on hand.  

In general, your savings should not be invested because the value could drop at the exact moment you need to spend it. Remember that the purpose of an emergency fund is not to put it at risk to make it grow, but to preserve it so you can tap it in an instant if you need it.

See also: Should You Invest Emergency Funds or Keep Cash?

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