When you first start your financial journey, you learn pretty quickly that there are many steps between the starting line (college graduation) and the finish line (retirement without poverty).
And yet, there are a ton of moving pieces.
You have to pay to live somewhere, you have to start paying those student loans back, you have to have a cell phone, and you have to spend your money on a myriad of other expenses that come up.
Worse still, you could be one of the millions of Americans who have credit card debt. But you know, deep down, that you should start investing.
How Do You Know If It's A Good Time To Start Investing?
As far as I can tell, before you think about investing, you should:
- Pay off your credit card debt and make sure you quit spending more than you earn so you never get into it again
- Look at the rest of your debts and if you're paying more in interest than you could get through investing, throw your extra money toward those debts
- Start saving half of your income
- Start investing
This is where it gets a little cloudy. Sometimes I wish there were a formula for “investment readiness” but I've looked, and there isn't.
I've paid off most of my debts, so more of my paycheck goes directly toward savings. Is it time yet?
I don't feel like I'm investing, but that might depend on what “counts” as an investment.
Investments That I Have That Aren't Stocks:
- Traditional or Roth IRA. Is that investing? I picked a target date retirement fund and max out my contributions every year (or at least for the last two years!). Fun fact: the amount went up this year to $5500. Maxing out each year plus the “magic” of compound interest still means I'm working until I'm 92.
- My New Condo. Is that investing? It definitely doesn't feel like it. Actually, at this stage, it just feels like paper signing and check writing. I suppose that in ten or fifteen years, it will feel like an investment. Hopefully it'll feel like a good one.
And now that all the checks have been written, my savings has been significantly diminished. Which means, I'm back to square one (maybe square two) on the “save some money” piece that I feel needs to be in place before committing some money to the investment world.
But how much money do you need to have in savings? I have a really super great savings account that gives me 2.25% interest up to $20,000. It's actually a checking account, with some monthly requirements (use the debit card 12 times, log in to online banking once a month) but the interest is better than I can get elsewhere.
So, do I wait until I have more than $20,000 there to start investing?
Or, do I build myself a cushion of six months of expenses, and then start investing?
Also, how did I end up being so scared of the stock market?
Why am I so conservative with my own money? Am I just too close to my past mistakes that I'm afraid of any amount of risk?
Transitioning into the Investor Mindset
In a few months, I'll transition my housing costs from the rental mindset to the owner's mindset. But the mortgage, unlike all my past debts, will not be something I funnel every single extra dollar into.
I'll have to view it as a fixed cost if I'm ever going to have any money leftover to invest.
So, I'm not ready now. But once I get “enough” savings (less than $20,000? not sure what will feel like enough) then I'll be ready to dip my toes into the wild world of the stock market.
Perhaps, just in time for the market to go down.
So, how do you know when it's a good time to start investing?
Great post. I agree that you really need to make sure your debt is paid off before you start investing. There are no guarantees on your investments. Plus cash flow is an important part of achieving financial independence. You can’t get there holding onto debt.
I didn’t start investing until I was close to paying off my debt. I did have a 401k through my employer, which is investing, but it is not as high touch as I would like. I plan on opening up an account in order to start dealing with dividend paying stocks and I will see how that goes. The only debt that I have is a mortgage.
Yesterday comes to mind as a great day, but since I can’t go back in time, today is just as good. In all actuality though, if you have any debt that carries a 7% interest rate or higher you should focus on paying down that debt. The market won’t generally return more than that so it’s a wash as far as your actual net worth growing.
You’re already investing in your target date retirement fund! Personally I never plan on “investing” in the sense of picking individual stocks, but continually investing in index funds. I invested even when I had consumer debt. I think the only time to delay it is if you don’t have a small EF or you have high interest debt. Anyway, the answer is generally “now” or “always” if you are a long-term investor.
When I first sat down, wrote down my budget, came up with my goals and set up my 401(k) it was one of the most liberating and inspiring moments of my life. Just starting, the sooner the better is a unique high that is hardly duplicated elsewhere. Of course if the debt (credit card or otherwise) is of a higher interest rate than the expected return on the investment that should be the priority. Even if it is not, debt that is not handled appropriately can have dire consequences on a credit score, which can be incredibly difficult to repair.