Updated: Mar 12, 2021
The thought of investing your money to earn potentially big returns over time can be exciting. Before you get started, it’s important to determine if you’re in a position to invest. You should only invest if you have the money you can afford to lose and can tolerate the volatility that sometimes comes with risky investments, such as stocks and real estate.
Here’s a checklist to help you decide if you’re ready to invest.
You have a financial plan. Your plan should include your goals and realistic deadlines to meet them. Are you trying to save up to buy a car in the next couple of years? Are you hoping to pay off your student loans ahead of schedule? Prioritizing your goals will help you figure out if they will impact how much you’re able to invest.
You can cover your monthly expenses without being stretched thin. If you have a generous amount left over after paying bills and other expenses to put toward savings, you may be ready to invest. If you’re living paycheck to paycheck and struggle to cover basic necessities, however, it may be better to hold off for now.
You have an ample emergency fund. It’s important to set aside savings specifically to cover unexpected expenses, like a costly car repair or hefty medical bills. Aim for a balance that’s enough to cover three to six months’ worth of expenses. If you don’t have enough funds to carry you through a difficult financial period, you may not be ready to invest.
You have very little or no credit card debt. If you carry balances on credit cards that charge high-interest rates, it’s best to pay them down or off before investing. A good way to start is by aggressively paying down the card that charges the most in interest, and continue to pay the minimum on all your other credit cards. Once that card is paid off, move on to the card with the next highest interest rate until the balance is zero. Rinse and repeat this method until all your cards are paid off.
You’re building your nest egg in a retirement account. Financial experts recommend setting aside 15% of your pretax income for retirement. You can put the money into a 401(k), 403(b), 457, IRA, or similar retirement account. If you have a 401(k) through your employer and you’re offered a match, be sure to contribute at least up to this percentage to avoid leaving free money on the table. If you’re fully funding your retirement account and still have the cash to spare, you may be ready to explore investing.
You understand that investments like stocks and mutual funds carry risk. They aren’t federally insured like bank deposits, so there’s a chance you could lose your entire investment. It’s equally important to understand that some investment products are far riskier than others. Because of these products’ value fluctuations, safer investments may be a better fit if you want to save for just a few years. They don’t pay as much in interest, but the risk of loss could be lower when you’re ready to cash out.
You are educated on your investment options. There are many investment options to choose from, including stocks, bonds, mutual funds, and exchange-traded funds. Do your research to learn more about how they work. You can also hire a reputable financial advisor to educate you on how the different investments work and lend a helping hand when you’re ready to invest.
The Bottom Line
You may be ready to invest if you can check all these boxes. Investing can bring generous rewards if you do your research and make strategic decisions. But it is not without risk, so be sure to prepare your finances before getting started.
Allison Martin is a Certified Financial Education Instructor (CFEI), syndicated financial writer, and author. Her work has been featured in The Wall Street Journal, ABC, MSN Money, Yahoo! Finance, Fox Business, Credit.com, MoneyTalksNews, Investopedia, The Simple Dollar, and a host of other reputable publications. She also teaches the essentials of personal finance through seminars and workshops.