When Should My Financial Goals Include Investing?
Investing is an important part of financial success, but it doesn’t make sense in all situations. Inside, learn when to start investing in the stock market.
September 30, 2021
When it comes to the right time to invest, people say, “There’s no time like the present,” but that’s not always the case.
Investing is a vital part of long-term financial success. However, it’s important to know when to start investing and when to focus on other financial goals. In some cases, investing may not be your best option.
This article will discuss when to invest in the stock market, and when it’s best to stick to short-term saving strategies.
When to start investing
The short answer to when to start investing in stocks is: as soon as is reasonably possible. However, there are some important factors to consider before you dive into investing.
In general, it’s a good idea to start investing when your situation matches most or all of these conditions:
You can comfortably cover all of your required expenses every month — rent, groceries, bills, etc. — without adding credit card debt
You have paid off all credit card debt and high-interest loans
You have a reasonable emergency fund saved up
You end each month with some money left over, or you’re willing to cut down on unnecessary spending, like restaurants and entertainment, to free up some additional funds
You are ready to start saving for your future
You may think that everyone in every life situation should invest in the stock market, but this is not the case.
If you have high-interest credit card debt, paying off that debt may be the best “investment” you can make. Credit card interest rates can range from 15% to 30%, and sometimes higher, while the average long-term return for the U.S. stock market is around 10%. Put simply, using extra funds to pay off credit card debt can often save you more money than you would earn by investing those funds.
If you don’t have an emergency fund, investing can be risky. This is because you may need to sell your investments if you have an emergency or job loss, forcing you to sell at an inopportune time.
Exceptions and special circumstances
The guidelines above are not hard-and-fast rules. As usual, there are some exceptions:
If your employer matches your retirement contributions, you should aim to max out this benefit — check with your work’s HR department for details
If you have low expenses or a secondary source of reliable income (e.g., social security, pensions) then you might want to prioritize investing over adding to an emergency fund
If you have low-interest debt, like mortgages and low-interest personal loans, it can make sense to invest rather than pay off debt
There may be additional circumstances that are specific to your situation. It’s wise to speak to a financial planner or adviser if you have questions or concerns.
Saving for long-term financial goals
When you are saving for long-term financial goals, a popular strategy is to invest in the stock market. Examples of long-term goals could include:
Saving for retirement
Saving for your children’s future
Saving for a once-in-a-lifetime international trip
Saving for a vacation home or second home
When you’re saving for a long-term goal, investing in stocks makes sense. Stock investments grow slowly over time, so the more time you have, the more investing will benefit your long-term, wealth-building efforts.
Plus, you can afford to take on slightly more risk when you’re investing for the long term. Over long periods of time, the stock market typically delivers strong returns. However, over the short term, it can produce weak or even negative returns.
For a goal to be considered long-term, it should be at least 10 years out. If you’re investing for the long run, stock market fluctuations won’t greatly affect your goals.
Saving for short-term financial goals
If you have short- or mid-term financial goals, the strategy for saving for these expenses will be a bit different. Examples of these goals could include:
Saving for wedding expenses
Saving for a down payment
Saving for a vacation
Short-term goals could generally be defined as less than 5 to 10 years away. For these types of savings goals, investing in stocks may not be the best choice.
Because the stock market can be very volatile in the short term, investing savings that you will need soon can be risky. For example, if you’re saving for a wedding that will take place 3 years from now, it’s very difficult to predict what the stock market will do over that period of time. You could easily end up investing your savings only to lose money by the time you need it.
Ideally, when you invest in stocks, you want the flexibility to ride out the bumps of the stock market. With short-term savings, this is often not possible.
Alternatives to investing in the stock market
If it seems like the right path for you is not to invest in the stock market at this time, what should you do with any excess funds that you have? You could consider:
Paying down high-interest debt, such as credit cards
Adding to your emergency fund — or opening savings accounts for specific short-term goals
Opening a high-yield savings account to earn some interest along the way
Purchasing lower-risk investments, such as certificates of deposit (CDs), treasury bills or Series-I savings bonds
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