Investing is a big and exciting milestone in your financial journey. When you invest, you have your money multiplying for you, paving the way to financial security and wellness.
But if you start investing before you’re actually ready, it may do you more harm than good.
So, how do you know when the time is right to invest your hard-earned money?
Well, I’m going to ask you 5 questions to help you figure out if you’re ready to invest.
5 questions to tell if you’re ready to invest
1. Are you saving more than you spend every month?
Building wealth starts with learning to save. If you don't get your spending under control, you won't be able to save, invest or make any improvements to your financial situation. You need money left over at the end of the month in order to move your financial goals forward. This simply means that you need more money coming in than you have going out every month.
Depending on your situation, you may need to focus on increasing your income by asking for a promotion or a raise or finding a side hustle, or you may need to focus on decreasing your expenses. You really don't want to be spending more than 80% of your monthly income. No more than 50% of your income on needs like housing or food and 30% on wants — things that make life a little extra fun.
2. Have you paid off high-interest rate debt?
Once you have some money left over at the end of the month, the next step is to use it to pay off any high-interest rate debt, meaning any debt with an interest rate over 7%.
Why is this important? Well, high-interest rate debt cancels out the financial gains that you can make from investing. It costs you more to carry the debt then you're likely to earn as a return on your investment. So, you have to get rid of the debt first to start paying off your debt.
7 secrets to pay off debt FAST!
Select the debt that has the highest interest rate and start putting more than the minimum amount towards it. After you've paid that debt off, start paying down the debt that has the next highest interest rate. And you can add the amount that you used to pay monthly on the first death that you've now cleared to your monthly payment on the second debt.
When you do this, the amount you can pay towards each debt increases with each debt, you pay off, repeat this until you've cleared all debt that is charging you a 7% interest or more.
3. Do you have an emergency fund?
An emergency fund is cash that's set aside for life's unexpected events, like unemployment, car accidents, or medical emergencies. And this is in place to prevent you from going back into debt.
How to build an emergency fund in 6 easy steps!
At minimum, you should have $1,000 in your emergency fund, but you should ideally build it up to six weeks to six months of expenses, depending on your situation and your comfort level. If you have good backup options — like you can always move back in with your parents or get a job with your uncle — then you can get away with having a smaller emergency fund. But if you have a lot of responsibility, like dependents who you provide for, you'll want a larger emergency fund for more security.
I recommend calculating your emergency fund savings goal and then setting up a monthly auto-saving to move money into a separate account each month automatically.
4. Do you understand what you’re investing in?
Never invest in something you don't understand. Take the time to learn about different investment options such as stocks, bonds, mutual funds, real estate, and more.
5. Do you have a clear vision of your financial goals, risk tolerance, and time horizon?
There are a lot of different investment options out there. Some will tie up your money for a long time; others are more easily liquidated. You need to make investments that align with your financial goals, risk tolerance, and time horizon.
Financial goals can be something like buying a house, saving for your child’s education (or more education for yourself!), or being able to start your own business.
Risk tolerance is exactly what it sounds like – your willingness to take on risk. Investments tend to operate on risk and reward, so the more risk you take on, the higher the potential return.
Time horizon refers to how long you’re willing to leave your money invested. As a quick note, this is one reason you need an emergency fund first. The best investments tend to be long-term, so you want to make sure you won’t need to take your money out because your car broke down.
Ok, let me explain why this matters with an example:
Let’s say you want to buy a house in the next year or two. You won’t want to invest that money in stocks (because that’s a longer term investment) or something like a 5-year bond, which may have penalties for cashing in early.
On the other hand, if your goal is to increase your net wealth, then it may be time to put some money in the stock market.
Again, all of this goes back to understanding your investments so you know which ones align with your goals and preferences!
If you want to learn more about risk tolerance and time horizon, we have a video where Britt explains those more thoroughly. I’ll leave a link in the description.
Ready to invest? Here's your next step...
Those are all the questions! So…how did you do?
If you answered “no” to any of these questions, then don’t worry – check out the resources I’ve linked below and you should be well on your way to making your first investments!
If you answered yes to all of these questions, then congratulations!! You, my friend, are ready to invest!
Here’s what you should do first: check out our free masterclass.
In it, we’ll teach you 3 essential tips to avoid losing money investing, how to overcome the 4 most common roadblocks that keep women from investing, and as a thank you for showing up, we’ll give you our investing checklist – 10 Steps to to Get Invested and Unleash Your Wealth-Building Potential.
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