We all know investing is important. But at what point in our financial plan should we invest? It’s a question on the minds of many. Financial experts all have their own opinions, so let’s take a look at some the advice that’s already out there. Here’s when you should start investing your money!
Many Investment Brokers: Invest Immediately
The investment brokers I’ve sat down with have told me that I should invest my money immediately. After all, I’m young, and I have a long time for compounding to work its magic. Typically they’ll pull out a calculator and show me how if I start investing $100 per month now until the age of 65, I’ll have over a million dollars in stock.
A million bucks is pretty tempting, but do they even consider my current financial situation? What if I’m broke and can’t spare $100 per month? What if I’m in massive amounts of debt and would benefit more from paying that down? Are they even thinking about these things, or are they just simply thinking about their commission?
Now, I’m not broke and I don’t have massive amounts of debt, but think about all the young people out there who are in financial trouble! Perhaps there are people who shouldn’t be investing right now because of life’s circumstances–perhaps they need money in the short term and should be saving instead.
Not all investment brokers advise investing your money immediately, but it is a reoccurring theme I’ve found. What has been your experience?
Financial coaches, on the other hand, align their payments with your interests. They consider your entire financial scenario and aren’t trying to sell you something you don’t necessarily need. If you’re looking for unbiased investing advise, it might be wise to contact one. You pay for their time, that’s it!
Suze Orman: Invest Conditionally
Suze Orman, a popular televised financial advisor, has written that you should invest only when you have met certain conditions. Those conditions are as follows:
- You must first have an eight-month emergency cash fund.
- You must not have a car loan or credit card debt at an interest rate of 6 percent or more.
- You must not need the money you’re investing for at least 10 years.
- You must be emotionally ready to invest and stomach the risk if your investments fall.
Not many people can immediately meet these qualifications. Check out the results of this poll from BankRate.com:
The Bankrate poll indicated that while 70 percent of the respondents have at least some money in a savings account, certificate of deposit, money market account or money market mutual fund, only 39 percent have enough to cover three months of living expenses.
It would take a decent amount of time for people to build up their emergency fund and reduce the interest rates on their debt. However, I think this is generally wise advise from Suze.
Dave Ramsey: Invest Conditionally
Dave Ramsey, radio host of the Dave Ramsey Show and creator of Financial Peace University, believes that you should meet the following conditions before investing:
- You must have an emergency fund of three to six months worth of living expenses.
- You must first pay off all your non-mortgage debt–yes, everything except your house!
- If you want to invest into non-retirement accounts, you must first fund your children’s education and be completely debt free (house and all).
Dave differs from Suze in that he believes you’ll be able to cope with a smaller emergency fund as you start your retirement investing, but stresses the importance of paying off debt before you start. Dave doesn’t play the interest rate game; generally, he just cares about the balances you hold.
Like Suze’s plan, Dave’s plan requires that people will have to wait to invest until the timing is right–which could take several years. Again, wise advise.
Other Opinions and Thoughts on Investing
I’ve found several more opinions on when you should start investing your money. Like many investment brokers, some say that you should pay yourself first regardless of where you are at in your financial journey and invest the money so that time works in your favor. I’ve also encountered those who don’t believe in investing at all, as they see the risk too high and would rather put their money into certificates of deposit or regular savings accounts.
There are those out there that are able to invest, but are too scared by the complexity of investing options out there. That’s understandable. But with solutions like Betterment (an online retirement and wealth-building investment platform) making it easier for people to invest, this group really doesn’t have much of an excuse anymore. Investing has been made pretty easy now.
When should you start investing your money? I like Dave’s and Suze’s recommendations. How about you?
Have you started investing your money? If not, what’s holding you back? Do you think you’re making a wise decision for your current financial situation? Let’s meet up in the comments!
{ 15 comments… read them below or add one }
Looks like good advice to me. The returns from investing can’t match the returns from paying down debt in terms of rate and risk unless the debt is on very favorable terms. So pay debt first, then invest.
Thanks!
Interesting & timely, as I start guiding my (young adult) children on this journey, now that they have been fortunate enough to find full-time jobs. Not only investing and emergency funds and whatnot, but long-term and short-term savings … All within their 10-minute attention span! I leave Dave Ramsey’s “Total Money Makeover” book out by the kitchen table so it is right there for quick flipping thru during any of their quick-eat times. This way they can be reading instead of listening to me.
I started investing when I was 18. I opened a Roth IRA and maxed it out for two years. I subsequently blew through all my cash so I stopped. I started up again with my work 401k, but I don’t make enough money to invest more than 3% at the moment. I agree that people should not invest just because of compounding interest. You need to be in a stable place financially before jumping in, and you should also know your risk tolerance as well.
Wow Jacob! My story is so similar to yours. I maxed out my Roth IRA for several years at a young age and then didn’t have much to do the short term things I needed to do. Thanks for commenting!
I have always met all the conditions of investing. But nobody really knows the benefits until cash out time comes 30-60 years later.
Over 40 years I’ve owned some stocks and had a lot more in annuities to spread the risk.
Another rule of thumb is to get out of stocks and other high risk investments at the time of retirement and that time had come. For some reason, I became very anxious about my annuities in 2007 and cashed out 95%. The investment counselor advised that I stepped into the market, so I should step out “to get those big gains.” I took the money and placed it in an IRA in the form or CDs when CDs paid well. The pay out was not much better than if I had that money in CDs all the time. The difference being CDs had no risk.
According to my income tax the year after I cashed out, my return on CDs was better than the annuity was the year before that.
I know about compounded interest on investments and I had to pay tax on CD interest each year.
Bottom line, at least in experience, is that the investors have you by the short hairs.
99% of all annuities are never cashed out but pass on to the next generation. The agent commission is 7%. All this is from my son who sells such instruments.
Knowing what I know now, I would just have kept my money in CDs.
Today, CDs pay little and I lose with inflation. But, I have no way of losing principle.
I don’t think for a minute that they don’t cook the books and all the Maddolfs have been caught. Did everybody forget about AIG and Enron? Yes they did.
I was approached by one agent at a social engagement, was also a reverend, for an annuity that pays 5% who was 65 years old. I later found out that hee lost his license to sell products because he went bankrupt. But he still finds people and has a licensed agent write the paper.
Another agent in a tie spoke about how well he was doing by remodeling his house etc. Some how he knew my profession and dropped how people in my profession were so happy with him because they were getting 16% in 2009.
My advice is play it close to the vest and invest in yourself. Start a side business and work it after your regular job.
OK, I’m not rich. I don’t own a boat, etc. But I do know I will be comfortable no matter how many cuts are made to programs and how high the taxes go.
Now a word about taxes. I always thought the Federal Tax code was written to encourage investment. How that changed with Reagan. If I was in the 95% tax bracket, you bet I would invest so I would only pay capital gains tax a few years down the road.
This I don’t understand. If I buy a stock, make a profit and cash it in a year later, I pay capital gains tax. However, if I am a dentist, invest in an office, I must pay tax on my profit as ordinary income. Dentist go belly up as well.
I follow the Dave plan and I advise my clients to the same. The reason why is that when you attempt to focus on too many things such as getting out of debt or building a fully funded emergency fund. When focusing on what goal at a time, you are able to better progress which is more likely to keep you motivated, just like losing weight. Progress is a powerful motivator.
Many people in the blogosphere encourage my investing (outside of retirement savings mutal funds accounts) but I am just not comfortable with it yet. I have an emergency fund but I’m concerned about needing the money for a down payment on a house (an investment in it’s own right) and paying down my car loan. For me, it doesn’t look like investing is in the near future.
Ten years ago, my wife and I bought an investment property on land contract from a friend. On one hand, we shouldn’t have done it because our emergency fund (according to Dave Ramsey’s standard) wasn’t fully funded yet. But we got a good deal and low percentage rate, and only put $500 down. We’ll have it paid off in 3 years. Looking back, I wish we would’ve had more in savings before we bought it, but I think it has worked well so far.
I agree with Suze Orman’s approach. What to invest in? Whatever you invest in, you have to sign up to do some work. I decided to pursue stock investing. There are several thousand companies to invest in, and if you follow the advice of Warren Buffett, you look for real companies that have been around a long time and have stood the test of time, which are healthy and profitable and have a way to protect that profitability while growing. And there are many, many of those companies to choose from. In fact, the biggest problem is the plethora of choices.
When you do that, you’re not investing in Wall Street, you’re investing in Main Street. And you can invest in accordance with your tastes and personality. Like healthy food? Whole Foods has been a good investment and probably will be for some time to come. Panera Bread, too, if you like the eating out side of that preference.
We’ve done well, and most of the thanks for that goes to you know where (nobody on earth). But you can invest in rental houses and many other things. Just invest and invest as early as you can.
I started investing 10% as soon as I had a full-time job, which was too soon according to various PF gurus as I had student loan debt and no emergency fund – then I moved on no money and took on a car loan, too! But it worked out. I never went into credit card debt, made all my investment payments regularly, started tithing, and built up an emergency fund. So it worked out. I’m glad I started when I did, though I’m also very glad I didn’t have any emergencies during that time because I was skating on very thin ice!
I think, there are two things important “When invest money” and “Where invest money”. I also want to go with financial advisors for “Conditionally Investment”. Some advisors suggest to start investing when you have additional money means it may be your saving that not needed in near future. I think, there is no specific time to start investing.
After taking decision about start to investing, big question is where to invest. Some good investment options are forex, stock, gold, mutual funds etc.
John, I want you share a new article about “Where to invest”.
Shawn, thanks for your suggestion. I believe I’ve written a few articles on where I invest, although I don’t consider myself an expert on it.
John, you are not expert but your suggestions and tips are really helpful for me and others.
This is something I struggle with, too. My wife and I are currently trying to pay off our debts, but I want to keep investing and even raise it a little bit each time we pay off a debt. Thanks for sharing your advice.