Is there a magic number or target amount that will signal to you that now is the perfect time to begin investing? Not exactly. The right time to invest will vary from person to person. But when you understand the considerations and have addressed some other important financial goals, you may be well on your way.
When Is a Good Time to Start Investing?
You may be wondering, "How much money do you need to start investing?" And that's likely because you're trying to figure out how you'll know when it's the appropriate time for you to invest. But the answer isn't really about some ideal amount of money or what the stock market is doing. The best time to invest is when it's the right moment in your financial journey.
Think back to basic algebra and the concept of "order of operations." This rule explains the correct sequence of steps for evaluating a math problem. When it comes to your financial wellbeing, consider the following order of operations:
✓ Cover basic expenses.
Set up a budget that includes everything from your monthly mortgage or rent payment to groceries and bills. Make sure to plan for all of the necessities. Does your paycheck comfortably cover these expenses?
✓ Build an emergency fund.
Creating a three- to six-month emergency fund means you can cover many unexpected expenses such as job loss or a medical emergency. This fund may help you avoid going into debt or dipping into retirement savings when challenging times strike. Is your emergency fund established?
✓ Pay off high-interest debt.
If credit card debt or personal loans loom large in your monthly budget, make it a priority to pay these debts off. This matters because high interest rates on this debt may cost you more than the potential rate of return from investing. Are you working on paying off any high-interest debt?
Until your basic expenses, emergency fund and any high-interest debt are squared away, you're likely better off putting your money toward these immediate needs first. Then it's time to consider investing.
Ultimately, the choice of when to start investing is more about gaining some understanding of personal finance strategies and creating a plan. Starting with the ideas in this section is a good start.
Exceptions to the Rule
Of course, as with a lot of rules, there are exceptions. It might be worth getting a jump on investing for one of the following reasons:
You have an employer-sponsored retirement plan with a match. You'll often hear that not participating in an employer matching program is like leaving free money on the table. If your budget allows, try to put in enough to get the company match. You can set up monthly, pretax deposits to help ensure you reach that amount over the year. Reach out to your Human Resources department to learn more.
Your outstanding debt is low interest. While paying off high-interest debt may be a priority, you might consider investing simultaneously if you have only low-interest debt payments, like student loans or a mortgage. Why? The potential rate of return on investments may help you benefit more from investing over aggressively paying off low-interest debt.
What to Know to Start Investing
There is no perfect amount that you need to save before you start investing. But once you satisfy your primary financial goals, it may be time to start putting money in the market. Before setting up an investment account, be mindful of the following:
Minimum investments. Depending on whom you choose to invest with, there may be a required minimum deposit to set up an account. This will vary but could be anywhere from $1,000 to $2,500 (or more).
If you don't have enough saved to hit that required minimum deposit, ask whether that requirement can be waived by setting up regular automatic investments or consider checking out other companies.
Investment timeline and goal. Before you begin investing, it's essential to consider what you're investing for. Is the money for retirement or something different?
Understanding your timeline and goal for the money will help you determine what type of investment account you may want to set up and how much risk you may be willing to take on.
Whether you're' investing for retirement or another goal, there may be taxes and/or penalties for withdrawing funds early. It generally depends on what type of account you start or invest in.
Investments should be for a longer-term goal. If you need money for a shorter-term necessity, that’s when an emergency fund comes in handy.
It Takes More Than Just Money to Start Investing
How much money you have to start investing is just one factor to consider. That's why there's no magic lump sum that is "enough" to start. Meeting other basic financial needs before putting money into the market can help get you on more solid financial ground. And taking advantage of benefits like employer matching can help jump-start your investment strategy.
However, everyone's financial journey is different, and that's why a financial advisor can help. By working with one you trust to create a plan unique to your finances, you'll be able to determine when it's a good idea for you to start investing.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.