when to start investing

Should I Be Investing or Saving?

Financial Decision Making, Investing, Spending & Saving

Short Answer: Or both? For short-term needs, you’ll want savings.  For long-term needs, you’ll want investments.  This is rarely an either/or decision, and with changing retirement plan types, it’s more important than ever that individuals understand how and when to start investing.

With apps, the power of the market is in the palm of your hand, making it easier than ever to invest. But, deciding how and when to start investing hinges on existing savings and whether you have “enough” to start investing.  

Establishing an emergency fund and savings is an important part of financial wellness. Without it, you could be forced to withdraw from retirement accounts, incurring hefty fees or penalties.

But, at what point do you know when to invest in the stock market? Read on to understand when to prioritize saving and investing.   

When to Keep Saving

Deciding when to keep saving will depend on a couple of factors. Here’s when you should consider saving over investing.

You have no emergency fund

Over half of Americans have less than three months’ savings in an emergency fund, reports Bankrate. If you don’t have emergency savings built up, you’re exposing yourself to risk. 

For example, say your car breaks down, you lose your job, or you have an unexpected medical expense. Without liquid savings on hand, you may end up racking up credit card or personal debt to cover costs. Alternatively, you could end up withdrawing from retirement accounts, incurring hefty fees to access the money early. 

Having emergency savings provides a cushion. When any kind of emergency arises, you don’t have to scramble to find money to cover the costs. 

When establishing an emergency fund, a good rule of thumb is saving at least three months of expenses. That means if you lost your income, you could pay for everything from housing to groceries with savings. 

If you don’t have an emergency fund, put aside cash every paycheck until you meet the three-month threshold. Bonus points if you can save up to six months of living expenses.

You have high-interest debt

If you have any high-interest debt, such as credit cards or a personal loan, consider paying this off before investing in the market. 

Why? Because the average stock market return over the last 100 years is 10%. If your debt carries a high-interest rate, say higher than 10%, you’d be losing money in the market in the form of interest charges on your credit card. 

If your high-interest debt compounds, you’re charged interest on your interest. That means debt can snowball, growing larger faster than you may anticipate.  Say, you have outstanding credit card debt with a 22% interest rate.  The money you are losing on interest outweighs any realistic investment return assumption. 

Paying off high-interest debt first will almost always yield a higher return than investments in the market. Plus, the relief of paying off debt can allow you to focus on other savings and investment goals.   

You’re saving for a big purchase

Debt paid off? Emergency savings in place? It might be time to start investing. 

If you’re planning on a large purchase in the future, such as saving for a downpayment or wedding, you might save a portion of your income set aside for investing. 

If your big purchase is three to five years down the line, consider keeping it in a high yield savings account instead of investing. This helps diminish risk. If you need the money in three years and the market is down, you may not have time to wait for it to rise, meaning you’ve lost money. 

If you can save for the purchase and invest simultaneously, it may be wise to do so. For example, you’re considering that big purchase in 3-10 years, and because of that, are comfortable taking on investment risk and waiting for the right time to make the purchase.  But, if your savings need is pressing and shorter-term in nature, you may prioritize more of your extra cash towards this goal instead of the stock market. 

When to Start Investing

Investing can be a great tool towards securing your financial future, but figuring out when to invest in the stock market will vary from person to person based on their financial goals. 
There are no set guidelines for when to invest, but consider these rules of thumb before jumping onto the latest investment app.

You have excess in your budget

If your budget is operating in a surplus each month, consider throwing the extra cash into retirement savings or another investment vehicle. While you’re at it, take a look at your overall budget. Are there places you could cut expenses, putting aside even more into investments?

You have a 401(k) match

Does your employer offer a 401(k) match or other retirement savings incentive? If you’re not participating in the program, you’re essentially leaving cash on the table. 

Taking advantage of a 401(k) match is essentially free money, as you only contribute a portion to your account, and your employer does the rest. 

If you’re not sure about 401(k) matching at your workplace, reach out to HR to learn more.

You’re starting a Roth IRA

If you have excess cash in your budget, but don’t have a 401(k) available to you, consider a Roth IRA. A Roth IRA is a retirement account with limited annual contributions. This can be a powerful tool for retirement savings, no matter your age or income, as it helps you save money tax-free for life. 

Even if your income is limited or low, putting away some extra cash in a Roth IRA can make a big difference down the line. 

You’re thinking long term

If you’ve satisfied short-term savings goals, it might be time to think about longer-term goals. If you’re exploring goals that are five-plus years out, such as retirement or future investments, it’s a good indicator you’re ready to spend more time in the market. 

One caveat of understanding when to invest in the stock market is liquidity. Once money goes into the market, it can be harder to pull it out.  The objective should be to “stay” in the stock market for long-term investors.  Troutwood’s Time Portal provides data on every career cycle since 1926, defined as concurrent 42-year periods.  Each period had unpredictable ups and downs but staying invested worked throughout all of them.

Am I Too Young to Start Investing?

There’s no perfect age at which to begin your investing journey, nor is there any age that is too young.  Warren Buffet famously started with $114 at the age of 11. We all move through life at different speeds, so while peers may be knee-deep into WallStreetBets, you might still be focusing on establishing an emergency fund, or taking that first step with a Roth IRA

While there’s no cut and dry rule of when to invest or at what age, generally, you should feel comfortable doing it once you:

  • Pay off high interest debt
  • Establish an emergency fund
  • Create a balanced mid-term savings goal

Keep in mind you may be able to balance satisfying some of these needs while starting an investment account. Just keep an eye on your budget to make sure you have enough left over for day-to-day needs. 

If you’re just starting your savings or investing journey, check out Troutwood’s newsletter to learn more straight from your inbox. 

Extra Credit

What is liquidity?

How easy is it to convert this asset into cash? That’s the metric by which liquidity is calculated. For example, cash or a savings account is high-liquidity—you probably just need to transfer it to an account to be used. 

On the other hand, physical assets like homes are less liquid. Assets need to be sold, and oftentimes they’re taxed when they leave the investment account. 

What is 401(k) matching? 

401(k) is a benefit offered by some employers. The terms will vary, but an example of a 401(k) match would be “matching 100% of your contributions, up to 3%.” That means the employer will match your pre-tax 401(k) contributions 1:1 until you reach 3% of your total compensation package. 

Example:  A $50,000 salary with a 3% company match.  This means, if the employee (you) contributes 3% of $50,000, or $1,500, your employer will contribute a matching $1,500, making the employee’s (yours) total contribution for the year $3,000.

Matching can be an excellent way to grow your retirement savings without upping contributions, and that’s why it’s often referred to as “free money.”

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