Moneymentals | Our Blog

How Do I Know if I'm Ready to Invest?

moneypurseThe fastest way to find the right answers is to ask the right questions—or at least ask enough of them. Good questions are homing devices for finding solutions and answers. Asking, “Am I ready to invest in the market?” is an intelligent question indeed. As you’ll see, it pays—literally—to look before you leap!

If your goal is financial freedom, you’re more likely to succeed at investing by being prepared. See if the following four statements fit your situation.

My Emergency Fund is in Place

Do you have an emergency fund? You need some liquidity so the unexpected doesn’t create a financial crisis. Ideally, this means three to six months of expenses in savings. Investing is counterproductive if all your cash reserves are tied up in the market, an emergency arises and you’re forced into debt or bad decision-making.

If you haven’t met this goal yet, every extra dollar should go toward your emergency fund before investing. If you’re investing already, pause until you build up your emergency fund.

I've Addressed Any Debt Issues.

Interest accrued due to debt can surpass potential interest earned from investing. By paying down debt, you’re actually making money. For example, someone paying 15 to 20% interest each month on a credit card gets a return of 15 to 20% compounded by paying more than the required balance each month!

There’s no stock investment guaranteed to yield 20% compounded. Debt reduction on a credit card is a great deal—so pay down that debt and congratulate yourself. You’ve just gotten 20% on each dollar.

I Won't Need the Money for More Than Five Years.

Investment values go up and down with market fluctuations. When will you need the money you plan to invest? The market might happen to be down at that time. Historically, there have been times when the market is down over a five-year period, but they’ve been less dramatic and less frequent than over a one-year period. Any goal that’s five years away or less is not something you should invest for. Put it in savings instead.

Let’s take this concept further. Can you lose any of the money at all? For example, you’re investing to save for a down payment on a house. You think a downturn is unlikely within eight years. What a bummer if you go to buy that house and don’t have enough because the market fluctuated! The more certainty you need with your money, the less likely you should be investing it. Risk decreases when your timeframe increases, so investing is a reasonable risk when you have a long timeframe.

I Can Tolerate Some Risk.

This one’s more of a gut check: If you’re a person who’s uncomfortable with any level of risk, investing might not be for you. What if the value of your investments goes down a little? What if it drops a lot and stays down a long time? These possibilities should not be so disturbing that they terrify you.

I always advocate peace of mind. My Blog How to Make Money: Save It explains why your most important goal is saving. It’s planting the seed. Investing is just extra fertilizer to help your savings grow. The fertilizer is optional, so you can always put your money into something very, very safe and avoid losing sleep over it. Your portfolio should reflect your risk tolerance, which usually changes with time and life events. If you’re not comfortable with investing now, some day you might be ready.

Getting Your Financial House in Order

Yes, investing is important, but it’s even more important to get your house in order first. Once you’re ready to start investing, should you do it yourself? That will be the topic of another blog…