Many of us understand that investing is an important part of the financial freedom journey. Investing is good and important if you want to see your money earn some real interest, work for you, and grow.
However, we don’t all understand when it is a good time to invest. There are several signs to check before you know you are ready to invest in the stock market, real estate, or other long-term investments.
4 Reliable Signs You’re Ready to Invest:
1. You have an established emergency fund.
This is the most important first step. According to a 2018 survey by the Federal Reserve, 39% of Americans don’t have a large enough emergency fund to cover a $400 emergency in cash.
It is always important to maintain at least a $500 -$1500 cash savings account in case of an emergency. This is the absolute minimum you need before you start risking your savings in the stock market. It would be irresponsible to put your money at risk in the market or in a long-term asset like a rental property if you are unprepared for the unexpected.
Most Americans rely on their credit cards as an emergency savings system. This is what gets them deep in debt because they end up paying over 20% interest and sometimes over several years. Often they could have avoided this debt had they planned ahead and paid it immediately in cash.
2. High-interest-rate debt has been paid off.
If you carry consumer debt with an interest rate higher than 5-7%, it is usually best to pay this debt off first. Most credit cards these days are over 17% with an average interest of more like 23%. If you have double-digit interest debt, focus any extra money on getting rid of this before any thoughts of short term investing.
You will save much more money by paying off the high-interest debt than you would be able to make in the stock market or on other investments.
If high-interest debt is an obstacle for you, be sure to set appropriate goals and start a spending plan to keep you on track.
3. You already invest in a 401(k), 403(b) plan, or other IRA.
Believe it or not, contributing to your employer-sponsored plan IS investing and a great place to start! Did someone say company match? Yes! That’s free money and something you don’t want to pass up. Take advantage of this benefit when offered by your employer.
I recommend contributing up to the max for the tax year, but if you are not able to do that, at least contribute up to the company match before you begin investing.
If your company doesn’t have a match, it is still important to take advantage of the tax savings and growth potential in an IRA. I think everyone should be saving in their 401K or other IRA always, even if it is only $20 a month.
4. You understand your WHY.
What goals do you have for the money you want to invest and what is your timeline for that goal?
The best money to invest in the market will be to support goals that are at least 3 to 5 years in your future and anything less than 59 years old.
You want the money you invest to be able to withstand the fluctuations of the market before you need it or before you consider taking it out. The history of the market shows that drops will rebound within 4-5 years.
Money for short-term goals like a big vacation next year, or a down payment you’ll need to purchase a home in the next two years is best placed in a savings or money market account, certificate of deposit, or a bond index fund to ensure safety by removing the risk of losing that money in the short term time horizon.