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.
4. You want money to grow over the long term.
Once you’ve prepared for unexpected events that could be around the corner and addressed any dangerous debts, it’s time to turn your attention to investing. But first, let’s take a step back and remember why you need to invest in the first place.
Why do you really need to put any amount of your money at risk in the first place? The answer is that most people can’t achieve their long-term goals and build enough wealth without investing. If you leave money for retirement in a safe, but low-rate bank savings or CD, it doesn’t have the opportunity to grow.
In fact, leaving money in a savings accounts can cause you to lose money. That’s because the historical rate of inflation has been about 3%. So, if you earn less than 3%, your money loses value over the long term.
If you earn less than 3%, your money loses value over the long term.
To get over that hurdle, and hopefully earn double or triple that rate of return, you’ve got to invest. The reality is that not taking enough investment risk can be the riskiest move of all!
Historically, a diversified stock portfolio has earned an average of 10%. But even if you only get a 7% average return, you’ll have over $1 million to spend during retirement if you invest $400 a month for 40 years.
But higher return investments usually bring higher risks, so they need to be used carefully. In other words, investing means that you could possibly lose money. This risk creates a tension that keeps many people from getting started investing in the first place.
If you’re hesitant to begin, it’s time to jump in and make a goal to invest as much as possible as soon as possible. The ideal amount is a minimum of 10% to 15% of your income.
But if you can’t set aside that much, there’s no shame in starting small. Even investing 1% or $20 a month is a great start and is better than nothing. Then increase your contributions by a percent or two each year. And if you’re starting late, don’t stress about it—just get motivated to start right now.
To sum up, a savings account is the perfect place for your emergency fund. But when your goal is to build a big nest egg for the future, letting your money earn next to nothing in a low-interest savings account won’t get you there.
5. You have a retirement account.
The final way you know that you’re ready to invest for the long-term is when you’ve opened a retirement account. To get faster results, it’s wise to max out a tax-advantaged retirement account before you put money in a regular, taxable investing account.
To get faster results, it’s wise to max out a tax-advantaged retirement account before you put money in a regular, taxable investing account.
If you have a retirement plan at work, such as a 401k or 403b, that’s the first place your money should go. I’m a big fan of these plans because they give you multiple benefits. Not only do they automate investing by deducting contributions straight out of your paycheck before you can spend them, retirement plans cut your taxes. And you can take all your money with you (including any vested matching funds) if you leave the company.
Don’t have a job that offers a retirement plan? No problem, just about everyone can have an IRA (Individual Retirement Arrangement). And there are retirement accounts for the self-employed, such as a SEP IRA or Solo 401k.
Set it up for monthly recurring electronic contributions from your checking account so your investments are spread out over the year and happen on autopilot. Just remember that taking money out of a retirement account generally means getting hit with a 10% early withdrawal penalty if you’re younger than age 59½. So, it’s wise to leave retirement accounts untouched for as long as possible to avoid taxes and penalties and get maximum growth.
One of the most powerful ways to build wealth and financial security is pretty boring. Simply choose low-cost funds inside a retirement account and contribute 10% to 15% of your income over a long period of time.
So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest now and will catch up later. If you wait for a someday raise, bonus, or windfall, you’re burning precious time.
Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.
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