Young professionals in their twenties and thirties often ask, when should I start investing? It can be difficult to determine when you’re financially stable enough or how much money you need to get started. Although these answers will differ for everyone, it is generally wise to start developing an investment management strategy and saving some funds almost as soon as you start earning them. You should consider putting away a certain amount per month to invest in your future. There are various ways to invest wisely, which we will explore in this article.
Prioritize Saving For Retirement
Although you may be working for decades to come and retirement seems a lifetime away, it is a good idea to start saving now to be able to support yourself in later years. While you may count on making much more money down the line, and plan to start investing then, that may not be the best course of action. Due to the principles of compounding, essentially how interest earns interest, investing even small amounts over a long period of time (decades) usually leads to substantially more money than investing larger amounts in shorter periods of time. According to U.S. News & World Report, “money growing at 6 percent per year will double in about 12 years, but it will be worth four times as much in 24 years.” With compounding, time can either work for you or against you. Starting early will not only put your asset to work for you, but will also give you the long time horizon needed to weather inevitable market swings. Go over your finances and decide what amount you can commit to investing for retirement either monthly or quarterly without having to withdraw it prematurely before you retire.
Should I Invest Excess Cash?
While saving for retirement is imperative, those funds will be virtually untouchable until you are in your sixties. While you can always tap into the account, there will be a hefty penalty for doing so. Therefore, you should also consider investing your excess cash into other, non-retirement accounts. But how do you know when to invest surplus cash or keep it in your savings account? There are a few things to think about before investing, such as:
Emergency Fund – Before investing surplus cash, it is wise to have fully funded your emergency reserves. There are ways to invest this cash and still withdraw it easily in a short time frame. Money market accounts can be a good place to hold emergency funds. In today’s low interest rate environment, your cash reserves may be best off earning interest in a traditional savings account.
Weighting the Time Horizon – The most important aspect to think about when deciding to invest is the time frame. For example, if you know you will be purchasing a house in the next five years and will need the funds then, you will need to invest differently than if you won’t need to touch the funds for years. Shorter investments tend to be riskier because if the market plummets, you will not have much time for it to recover, as in longer-term investments.
Risk Tolerance – When planning to invest, you should consider an appropriate investment based on your personal risk tolerance. Diversification is a key component to a risk management strategy, but note it is harder to achieve meaningful diversification when investing smaller amounts, such as a few thousand dollars.
Taxes and Other Costs – Along with your time horizon, consider the impact of taxes and other fees on your overall return. If you only plan to hold an investment for the short term, taxes and other costs like trade fees and commissions may negate your return. Don’t like the idea of paying your advisor commissions? Fee-only financial advisors do not accept any commissions or sales charges.
While investing is a wise choice to secure your financial future, you should consider many factors before committing. Figure out your finances, and account for any unexpected expenses that may come up. Also, remember that investing is always risky, and how much risk you wish to assume is up to you. However, with a long time horizon and a diversified asset allocation strategy, it may make sense to put your excess cash to work for you.