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How can I tell if I’m ready to start investing?

11 Nov, 2018 | Financial literacy, Investing

Investing — These nine letters can send anyone into a tailspin or make them giddy with excitement.

Here’s the truth, investing can be as difficult or as simple as you want it to be. But one of the more difficult hurdles is figuring out if it makes sense for you in the first place. There are plenty of arguments for and against the idea. And while they might all be true, that doesn’t mean investing is right (or wrong) for your unique situation.

The real question is: are you ready to invest? If you’re still sitting on the fence, read on for some clues to point you in the right direction.

Your job offers an employer match program

Many jobs offer a 401(k), which is a type of retirement account that gives you some control over how your money is invested. These can include mutual funds, stocks, bonds and money market accounts.  

Sometimes your company will offer an employer match program. This means your company will match your contributions capped up to a certain percentage of your paycheck. For example, if there’s a 6 percent maximum contribution and you set aside 5 percent of your paycheck of $2,000 a month, it’ll match the $100 you invest. However, if you contribute 10 percent of your paycheck, the company will contribute $120, not $200, because of the contribution cap.

Yes, we’re talking about free money right there! Even if you don’t think you can contribute a lot, even a little is better than nothing. As for how much you stand to gain, it’s best to check with your employer to learn how its specific plan works.

You don’t have any short-term savings

Life happens. You blow out a tire, you need emergency dental repairs, or your roof sprung a leak. Unexpected expenses will happen and without an emergency fund in place, you’ll struggle to pay for them. And paying for those expenses can lead to long-term financial issues if you need to go into debt to do it (which is a sign you may not be ready to invest).

If you don’t have any money set aside for life’s unpredictable moments, then hold off on investing until you’ve built up that emergency fund.

You’re a budgeting ninja

Setting aside money for daily expenses, short-term savings, and long-term savings requires you to be pretty darn good with your budget. You must know where your money is coming from and where it’s going and understand the need to cut back certain expenses. Only then can you plan for now while saving for the future.

If you’ve been fairly good with budgeting, have an emergency fund and can find some wiggle room to set aside money each month, then you’re in a great position to start investing.

You have a ton of consumer debt

Experts disagree as to whether you should invest when you have debt – some are for it, others against it. However, not all debt is created equal, and that’s where the argument requires more thought.

Time is compound interest’s best friend, which is a smart and compelling argument for investing early. Think of compound interest as interest you earn on interest. Let’s say you invest $1,000 and you earn $80 in interest, then you’ll start earning interest on $1,080.  

However, if you’ve got high-interest debt — like personal loans and credit cards — it may be a better idea to take care of those first before investing.

Investing can help you earn money, but the interest you pay on your consumer debt may negate all those savings. For example, if you have a $10,000 credit card balance at 16 percent interest and you make a $200 payment each month, you will still pay $952 in interest.

It’s difficult to find an investment that’ll give you a rate of return higher than that amount. Plus, investment does carry some risk. You really don’t know how much you will earn, and sometimes you may lose money.

You’re willing to do the work

Investing doesn’t have to be complicated. But putting money aside for retirement does require you to look at your goals and, frankly, just start. It’s about whether you’re willing to put in the upfront work to do your due diligence and find the right investment options that work for you. That includes understanding the kind of investor you are — do you like to take risks, or do you prefer a more conservative approach? You should also consider what you’re investing for and what your timeline is. Are you investing for a down payment in 5-7 years or retirement in 20-30 years?

If you’re ready to invest, one of the biggest mistakes is to not start investing! But if you’re not ready, give yourself a target date or set a benchmark, such as paying off your credit card debt or setting aside a certain amount in your emergency fund.

In either case, you’re making the best decision based on your current financial situation. You can’t do much better than that. Well, except maybe winning the lottery.

If you’re ready to invest, or just want to stick to saving, check out the Qapital app. We offer tailored investment options based on your risk profile and our award-winning savings features can help you automatically save for any goal.

Sarah Li Cain