If you ask nearly any financial advisor when to begin investing, you will probably hear something along the lines of as soon as possible! It makes sense — after all, the sooner you begin investing the greater the positive impact from the time value of money will be.
But most often, exactly when to begin investing will depend on a number of personal considerations.
Investing involves taking on a certain amount of risk, and how well you can handle that risk will depend on your situation. Before investing for the first time, there are a few things you will need to consider.
Make sure you can live on your paycheck.
There’s one very important fact to be aware of when you invest money: the money that you put into your investments will not be available for spending. You need to live on your current paycheck — less the amount you are allocating for investing.
Basically, you have to live within your means, and to do so will require that you have some sort of budget set up that will enable you to live on less money.
If you’re accustomed to spending 100% of your paycheck to pay bills and other necessities, you’ll have to find the money needed to invest and to do it on a regular basis.
Have some money set aside that you be invested.
No matter how enthusiastic you are about investing, some of your money should always be held someplace that’s completely safe. You will be taking risks with the money you are investing, so some of it must be held in a risk-free status.
For beginning investors, the best place for this cash is in an emergency fund. You can hold it in a savings account, money market fund or very short-term certificates of deposit (CD’s) — since all are both safe and highly liquid.
The idea is to have money you can get your hands on in an emergency, so you don’t need to liquidate investments to raise the necessary cash.
Keep your debts to a minimum.
You might have a mortgage and/or a car loan, but you will need to keep your debt to a minimum before investing.
Here’s the thing — if you are trying to invest money to grow your investments, you are largely defeating the purpose if you owe a substantial amount of money in credit card debt at 10% interest or higher. The money you make on your investments is being paid back to the bank, to pay your credit card interest. That’s like putting the money into one pocket, only to pull it out of the other.
In addition, the less debt you owe, the more money you will have available to put into savings. And taking it a step further, paying off a credit card with a 10% rate of interest is like locking in a 10% investment return forever.
Paying off debt is one of the best “investments” you can make, and a guaranteed one at that!
Educate yourself before taking the plunge.
Before investing any money, spend some time learning how to do it. Sure, you can invest in mutual funds and exchange traded funds so that the money will be managed by professionals.
But you still need to learn about portfolio allocations, market risks and at least enough investment terminology to be conversant.
Even knowing just a little bit about investing will help you to ask intelligent questions. And that’s important because ultimately, you are the one who is responsible for your investment success or failure.
The more you know about investments, the more money you’ll make and the more successful your investments will become.
Understand your personal risk tolerance.
Before investing a single dollar, you first need to seriously consider your risk tolerance. In order to be successful, you will have to invest at least some of your money in the stock market. How much will largely depend on how much risk you can take on and still sleep at night.
You can manage risk through diversification, and that will minimize your exposure. But you will still need to get comfortable with some level of risk, and that’s often done gradually.
Dollar cost averaging is one of the very best ways to move into the market gradually, helping you build and develop your risk tolerance as you do.
Set the proper expectations.
It’s critical to understand that investing isn’t remotely related to get-rich-quick. In fact, it’s far more closely related to getting rich slowly.
You need to grasp this concept so you don’t become frustrated and give up on investing because you aren’t doubling your money every year. You’ll especially need the perspective for those times when the markets are in decline mode and pulling your investments down.
Think of your investments as an eventual replacement of your employment income, not as a quick path to riches. There will be some years when your investments will do really well, and others when you may find yourself wishing you had it all in a passbook savings account.
You’ll need patience through it all, and after many years you’ll be handsomely rewarded for your efforts. Only the right expectation will allow that to happen.
Get all of these factors working in your favor, and you’ll be already to hit the ground running with your investments.