The simple answer to this question is “as soon as you have money.” Ideally, you should start investing whenever you have money to invest. Time is on your side and those who start young will be very richly rewarded. That said, life sometimes happens. Not everybody is in a position to invest for retirement, perhaps because they have other more immediate obligations (medical emergency, family issue, high-interest debt, etc) or maybe they just plain don’t make enough money at the moment to save money after buying the necessities.
At the risk of wading uncomfortably deep into Dave Ramsey territory I’m going to lay out a few basic guidelines for when you should definitely start investing for long-term goals.
You’re Ready To Start Investing When…
You’re consumer-debt free
While there are some exceptions (you should definitely invest at least enough to get the full 401k employer match regardless of your other obligations, for example) you will get more bang for your buck from concentrating on paying down high-interest consumer debt than investing in the stock market. Over the long term, stocks have averaged in the 8-10% per year range. Credit card interest rates, on the other hand, are usually in the 13%+ range. It would take an incredible amount of skill to earn more in the stock market (or even with real estate) than your credit card charges. Warren Buffett can probably get away with taking out a cash advance on his credit card in order to invest in stocks, but you and I sure as hell can’t.
You don’t have to cut corners on your health to come up with money
I am a very firm believer that your health is your most important asset. While I’m not saying you have to be able to afford organic everything and belong to a fancy gym before you start to invest, you definitely shouldn’t be cutting corners on your health. If the only way you can come up with extra cash to invest is to skimp on your health insurance coverage, skip doctor visits, or eat processed junk rather than fresh vegetables, you should seriously reconsider opening that Roth IRA. That’s right: I’m telling you not to start a Roth IRA if you can’t afford to eat well. First things first.
You have an emergency fund
Some people argue a credit card or home equity line of credit (HELOC) can function as an emergency fund and while that’s probably true for people with substantial assets, there’s really no substitute for having a cash emergency fund, in my opinion. Some gurus recommend you have 3 months worth of expenses in an emergency fund, others 6 months – I’m personally more comfortable with 12 months – but however much you decide is sufficient for your situation, build up your emergency fund in full before you start investing for retirement. I find myself having to use my emergency fund far more often than I would have thought possible when I first started one. This goes doubly for homeowners. Sh!t is always breaking.
You have realistic expectations about investing
It’s quite sad how many people I come across on the interwebs with insanely unrealistic expectations about investing. In fact, it appears this describes a sizable minority of the general public. Why else would the “earn 20% per month investing in xyz” scams be so prevalent? Somebody must be buying into that crap. If it sounds too good to be true, it probably is. You aren’t going to earn more than 8-10% per year with a properly diversified portfolio. You’re just not. If you’re expecting more than that, you probably shouldn’t be investing because odds are good you’ll fall victim to a scam and lose all your money eventually. You are Madoff’s wet dream.
You understand the basics
I don’t care if you aren’t interested in investing. You probably aren’t all that interested in brushing your teeth or flossing either, but you do it. Why? Because it’s good for you. It’s just something you have to do. It’s the same with learning about personal finance. Not being interested isn’t an excuse. Man (or woman) up and learn the basics. There are a billion good personal finance blogs on the internet, tons of good books on the subject, and some great internet forums like Bogleheads.org to help you along the way. You aren’t alone. The information is out there and investing isn’t difficult. Just do it. No excuses.