I distinctly remember the first adult conversation I had about getting started with investing. I was 25, making about $18,000 a year and still carrying tens of thousands of dollars in student loan debt.
One of my former college roommates and I were walking around New York City talking about the new life stage we were in. We were two years out of college, feeling caught between childhood and adulthood.
“I actually opened a Roth IRA the other day,” she told me.
She laughed as she said it, because she couldn’t believe she was saving for retirement. I couldn’t believe it either. Investing felt scary and hard, like something reserved for real grownups. I hadn’t even landed a full-time job yet. How could I start investing?
Yet the numbers don’t lie. Investing when you’re younger is the best bet for your money. Compound interest builds and builds over time, so the earlier you start investing the more money you stand to earn. So the answer to when you should start investing is obvious: as soon as possible.
When I was 25, there were other drains on my money. I was facing an uphill battle. I had low income, high debt and no knowledge of investing. I didn’t even have a company plan I could participate in, because I didn’t have a full-time job!
Starting to invest is a smart choice, but it’s a complicated one. Few people have straightforward money situations and opportunities. If you’re wondering where and how to start investing, keep reading.
The Determining Factors
It’s not really as simple as “start investing as soon as you can.” Investing is a priority, but there are other financial steps you need to take first.
For example, having a fully stocked emergency fund in an accessible savings account is a huge financial priority. You want to have three to six months’ worth of living expenses tucked away.
Emergencies happen all the time, and having the capital to deal with them is a necessity. You don’t want to have to tap into your investments to deal with a car repair or a hospital bill.
Other financial priorities could include paying down high-interest debt. If you have a debt that has a higher interest rate than your investing return, you’re losing money each day you carry the debt. So it works in your favor to pay down high-interest debt as soon as possible.
When Should You Start Investing?
Since there’s not a cut-and-dried answer to this question, let’s examine three different financial situations.
Jen has a full-time job that offers a company 401(k) match of 3%. She makes $35,000 a year and has $40,000 in student loans. She’s diligently been saving money to her emergency fund but still has about $1,000 to go before that’s full. She has a fair amount of flex money each month, which she splits between her emergency fund account and fun money.
In this case, Jen should start investing. Why? She gets a company match from her employer, which is essentially free money. By investing 3% of her paychecks and scoring that match, she’s investing 6% each year without a big drain on her income.
Secondly, her debt is low interest. Student loan interest rates usually range from 1% to 7%. That’s much lower than credit card or auto debt rates.
Jen would lose out on earning money in the stock market, where index funds generally see annual returns of 3%–6%. Since the rate for investments is higher, she would do well to start investing today.
Someone in Jen’s position should take the company match, finish funding her emergency fund and then focus her extra money on both investing and paying down debt. As she pays off her debt, she can redirect the money used for those payments to her investments.
Rodrigo works 40 hours a week as a freelancer. He makes $45,000 a year, has a $10,000 emergency fund and $4,000 in credit card debt. Since he’s a freelancer, he has no company match for any investment accounts. He has money left over each month after bills and is continually pitching himself to new companies.
Rodrigo should start investing as soon as possible. As a freelancer, income can vary month to month, which can make investing seem foolish.
In reality, Rodrigo is totally responsible for his own financial security. He isn’t eligible for a pension or a company-sponsored retirement plan. If he doesn’t invest his money, he’ll never be able to grow real wealth and stop working.
Since he is a freelancer, Rodrigo doesn’t have to automate a specific amount to investing right away. He can set an annual goal and tailor the amount he invests each month to how much he earns that month. He can also pick up a client whose payments go specifically to his investments, so he potentially can sock away the same amount each month to investing.
Rodrigo should also pay down his credit card debt in tandem with his investing.
Michelle makes $75,000 a year as a digital marketer. She has a $12,000 auto loan, $8,000 in credit card debt, and $25,000 in student loans. She lives paycheck to paycheck and finds her debt stressful. Her company offers a 401(k) plan, but no match. Michelle has no emergency fund, since she wiped it out to put a down payment on her car.
Michelle needs to get the rest of her financial house in order before she gets serious about investing. Since her company doesn’t offer a 401(k) match, she’s not losing out on free money by not investing right away.
Her high-interest credit card debt and lack of emergency funds should be her short-term goals. Since Michelle carries so many types of debt, she is especially vulnerable to an emergency. She has a lot of mandatory payments each month, and missing one could mean piling up more debt through penalties. Worse, if she has an emergency right now, she’d have to pay for it with her credit card, which also means more debt.
Michelle should look to build up an emergency fund that has three months’ worth of living expenses right away. From there, she can focus on paying down her credit card debt.
After that, she can begin investing. Once her immediate cash crisis (lack of emergency fund) is gone and her high-interest debt isn’t draining her free money, she can redirect nonessential spending to her investments.
The Right Time for You
As much as I wanted to go home and open an IRA after speaking with my friend, I didn’t. I knew I didn’t have the funds to spare. I was living paycheck to paycheck. Starting to invest would have pulled at money that simply wasn’t there.
Instead, I spent the next year focusing on increasing my income and paying down my student loans. With more than $18,000 at my disposal and no debt, I was able to start investing aggressively about 13 months after that first conversation. I not only opened an IRA, but maxed it out. That’s something I’ve continued to do in the ensuing years.
You definitely want to start investing earlier rather than later, but you don’t want to do so at the expense of your financial or emotional health. Get your finances ready for investing first, and then take the plunge into investing!