If you're like most people at the start of their investment journey, you may not be active in the stock market yet. Two-thirds of adults ages 18-35 aren't investing: the biggest reason people do not invest in the stock market is not having enough money to invest (48 percent), followed by not knowing enough about the stock market (25 percent), according to a survey conducted by Bankrate.
Working with a financial advisor can help you determine if you're ready to invest or, if not, what it'll take to get you there. Before you meet with a professional, you can do a quick financial assessment yourself. Here are four signs you're ready to start investing:
1. You have an emergency fund
It’s best to have cash that you can easily access in case of an emergency. If you suddenly lose your job, total your car or break your leg, but your money is allocated in nonflexible accounts, it will be hard to deal with the cost of the unanticipated event.
Emergencies are unpredictable, and it’s challenging to estimate how much having one will cost. However, you can calculate how much it'd cost if you lost your job (or cannot work); you'll still need to pay for food, utilities and housing. It may be best to keep at least three months' worth of living expenses in a savings account or money market account – yes, it can sound daunting for some. If you haven’t started saving yet and this seems like a far-off goal, start with something small: aim to save $1,000, then $2,000 and so on.
Still not sure where to start? Print out a copy of your checking account transactions and highlight any purchase that wasn’t necessary, commit some portion of those amounts to savings for the next month. Most of us can find some opportunities to save, however small your savings contributions may seem, everything counts in an emergency.
If you already have an emergency fund in place, that’s one sign that you’re ready to start investing.
2. You don't have high-interest debt
If you have high-interest debt, like a credit card or a line of credit, this should be one of your top financial priorities. The longer it takes to pay off your debt, the more it'll cost.
Between 2006 and 2016, the average fund had a 4.33 percent return. This is good for the investor, but when compared to the fees incurred by a credit card interest rate of 16.15 percent – the national average, according to CreditCards.com – putting funds toward debt payments may be more worthwhile in the long run.
The exceptions to this rule include "good" debts, like a mortgage, student loans or an auto loan. If you're responsible, have a sound payment plan and can afford to make your payments while you invest, go ahead and begin investing.
3. You have long-term financial goals
Identifying long-term financial goals will help you determine if it makes sense to invest as a means to save. For example, if you plan to buy a house next year, investing isn't the best way to save for the down payment. Using your investments to save for short-term purchases can be ill-advised, though the stock market may increase over the long-term, it can fluctuate in the short-term.
A sound investment strategy develops over time. Investing can be a smart solution for a purchase you’ll make more than five years in the future. Your child's education, a sound retirement, a boat you'll buy in 10 years – these are all great goals you can work toward with the right investment strategy.
4. You stick to your budget
Creating and following your budget will help you learn how much you can afford to invest. This begins with a thorough understanding of your income and your expenses – both the necessary and unnecessary ones. This reflection can give you some great insight on how you handle your money.
A sound budget will help you maximize your investment opportunities by showing you how much cash you can spare while also showing you where you can save on unnecessary expenses. Working with a financial advisor can help you feel more confident in your investment decisions by helping you determine how much you can afford to invest based on your goals and lifestyle.
Not sure how to get started? Schedule your complimentary consultation today.
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