For many years of my twenties, I had asked myself this very question. Based on my experience and research this article summarizes when is the best time to start investing.
First Set Up An Emergency Fund and Ensure You have No High Interest Debt
If you have recently graduated from college or perhaps recently started actively engaging in your personal finances one of the important first steps is to save up for a six-month emergency fund. This is enough savings so you are able to cover all your living expenses for six months in case you lose your job.
Pay down any high interest credit cards or other high interest debt first. High interest debt can be even more costly than any investment gains and it is important to prioritize paying down this debt first. High interest debt is considering anything above a rate of 8% or more. This would typically include most credit card debt. Please visit investor.gov to learn more about the importance of paying off high interest debt.
Invest in your Employer Sponsored 401(k)
One of your first investment goals should be to invest in your employer sponsored 401(k) at least up until the company match. Since I started working after graduating from college, I have pretty consistently been contributing to my employer sponsored 401(k) and now have a sizable investment. Just be sure to be aware of the 401(k) contribution limits which for 2022 is $20,500. For more on planning for retirement please visit how to plan for retirement.
Research What To Invest In Then Start
Once you have completed the steps above you are ready to start investing, just be sure to do proper research or consider a financial advisor. There are lots of great resources to make sure you are investing wisely, below are some the resources I have used:
1.) Research on the internet, be selective by going to reputable websites such as Nerdwallet.com, Investopedia.com, or Fidelity.com.
2.) Read personal finance blogs such as FinancialSamuria.com and clevergirlfinance.com.
3.) Read books such as The Intelligent Investor and The Millionaire Next Door.
4.) Talk to others about what investing strategies have worked for them including family, friends, or different online groups. Just be sure that you take the knowledge as a datapoint and be sure you balance it with other information from other reputable sources.
5.) More recently I have started to use social media and followed instagram accounts. There are many accounts that provide great information, are inspiring, and are also entertaining. I’ve always enjoyed being part of a community and there is an online community of people trying to maximize their personal finances just like me.
As with all these sources of information, please use them as a data point and be thoughtful when applying to your own situation. You can always hire a financial advisor to assist with your investment strategy.
Starting Small Will Help You Gain Confidence
In the case of investing the smaller you start can actually be better. This is because you’ll get practice so by the time you are investing more significant amounts you will already be comfortable with the process.
For me, I learned this the hard way and kept waiting to invest beyond my 401(k) until I had more substantial funds. In hindsight if I would have started sooner, I would have almost certainly would have a higher net worth. The good thing is that it is never too late to start.
One of the best ways to learn is by diving right in and trying on your own. If the stakes are lower in the beginning, you’ll be ready when the stakes and your income are higher.
Plan For the Long Term and Diversify
There are several investment strategies to choose from, regardless of which option you select plan to invest for the long term and diversify. Particularly if you invest in the stock market it’s good to consider limiting your holding of individual specific stocks to a smaller percentage of your portfolio (if you hold any at all). Then if you hold index funds expect that if the market goes down, you’ll want to be patient.
Generally, time in the market is more important than timing the market. Even the most experienced investors can have a hard time timing the market. So to simplify the decision I worry less about whether it is the right time to invest and think more about my long term investing strategies.
If you are planning any large purchases in the next couple years such as a down payment on the house be sure to think carefully about whether to invest into the stock market. Whenever investing in the stock market or other investments there is a risk that the investment can go down, so it is important to understand any risks prior taking action.
One way to help the uncertainty is to have a well-diversified portfolio. This means both within the stock market it is better to have multiple stocks and even consider an index fund. Also, it is wise to invest in bonds and / or real estate in the long run.
Especially during times of stock market uncertainty, it is helpful to own different assets so no matter what happens with the stock market you still have additional assets to rely upon. As with all forms of investing it is better to stay the course and not move your assets around especially in dips.
The Best Time to Start Investing is Now
After you paid off high interest debt, saved up an emergency fund, and completed your research you are ready to start investing! Try not to think too much about timing the market and focus more on having a diversified investment portfolio in the long run.
You can start small and continue to grow your portfolio as you continue to save. I started investing in my early to mid-thirties and if you are able to start earlier than me that would be even better.
It is certainly better to start late than to not start at all. But the earlier you put together a plan, start investing, and stay the course the better. You can always make adjustments to your portfolio over time, just keep in mind that anytime you sell an investment you’ll have to pay taxes on the realized gains. Then depending on how long you held the investment will determine how much taxes you will have to pay.
Where as if you continue to hold your investments then you’ll save on taxes. Short term capital gains tax is a tax on profits from sold assets that have been held for less than one year. Short term capital gains tax is equivalent to your ordinary income tax rate.
If you are able hold onto assets for longer than one year, then you’ll qualify for long term capital gains tax. Long term capital gains tax is 0%, 15%, or 20% depending on your taxable income and filing status. For more information on capital gains taxes visit Nerdwallet capital gains tax rates. Typically, it is better to hold your investments as long as you can to reduce any taxes.
Be Consistent In Your Strategy and Continue to Invest
Once you have started investing and are comfortable with your portfolio as you earn additional income or receive bonuses continue to invest. Alternatively, you can automate sending a portion of your payment directly to your brokerage account or other investments.
To build wealth it is best to stay consistent and keep living within your means and then invest your additional income. As with many things in life sometimes it is best to just start rather than overthinking and planning for the exact right time to start. If you keep waiting to time the market, you may miss out on investment income. It is better to start earlier and let the power of compound interest do a lot of the work for you.
Summary
Once you have saved up for an emergency fund, paid down any high interest debt, and completed research you are ready to start investing!
- Be sure to invest in your employer sponsored 401(k) plan at least up to the company match (if available)
- Start with small amounts to build your confidence
- Plan for the Long Run and Diversify
- Start investing as soon as possible
- Be consistent and continue to invest whenever you have funds available
- Live within your means and consider automating contributions
I’d love to hear about your investing experiences and when you started to invest? Were you able to start earlier in your career than me? Or did you have to overcome certain circumstances prior to investing? We all have a journey and I’d love to hear yours!
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