How Do You Know When You’re Financially Ready To Start Investing?

2013 June 3
by Kyle Bumpus
from → Personal Finance

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.

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9 Responses
  1. 2013 June 3

    I’d still open the Roth IRA.

    Even with all the debt I’m going nuts about paying down, I still max out my Roth IRA because it can function as a de facto emergency fund since there are no penalties to withdraw.

  2. 2013 June 3

    My believes are slightly different. Although I completely agree with your statements I believe everybody should start investing as early as possible no matter what. If you will be waiting for “as soon as you have money”, you may never start investing. Any investing process should be based on “pay yourself first” rule even when you are in debt. Instead of contributing 200, 300 or 1000 dollars monthly, contribute $50 to your retirement or investments and 150, 250, or 950 dollars towards debt. Once you pay off the debt redirect your contributions to the full retirement savings. Even $50 monthly can grow big in 30 years.

  3. 2013 June 4

    Agree with Martin. You have to pay yourself first or you will never get started. In your 20s and early 30s, you might use debt as an excuse to not save. In your late 30s and 40s, it will be kid expenses as the family grows. You have to start early.

    Now, if someone has massive amounts of debt, I would focus on that first, but I would still find even 1 or 2% to go into investments.

  4. 2013 June 4

    Well I am good on three of the points, but an emergency fund of 3-12 months just isn’t gonna happen right now. The investing comes first, then growing the emergency fund.

  5. 2013 August 14

    I agree, emergency fund comes after investing

  6. 2013 September 25

    I might also add that sometimes a short-term goal will trump a long-term goal. If you need to save up for a deposit on a house inside five years, that money would be better off in savings. Something with low volatility and low interest rates. You may want to defer retirement investing until enough is saved for your short-term goal.

  7. 2013 November 7

    Oh I found it very helpful post to all of us. You describe some good points like 3-12 months cash in emergency fund, If your today is secure then you can secure your future..

  8. 2013 November 16

    You only start investing when you do not need the proceeds from your investments. Invest only money that you do not need for 5 to 7 years to come.

  9. 2013 November 24

    Excellent points Kyle. I can agree that the sooner one can the better to start investing. Reality is though, I doubt we ever have “enough” money. Our expenses tend to rise with our income more often than not. I agree with Martin here, it has to be a conscious effort. You have to set apart the funds to invest from your budget, however small they maybe but start.
    What I do agree with is on health. Its crucial. Without health then what worth does the money have when you have no chance of properly enjoying it?

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