Since you’re sitting here reading a personal finance blog, I’m going to assume you already know the importance of investing your money. And while most experts will agree that the sooner you start investing the better chance you’ll have of building wealth, there are a few questions you should ask yourself before you start funneling your paycheck into stocks, bonds, or mutual funds.
Am I Living Within My Means?
If you’re living paycheck to paycheck (or even worse, you’re spending more than you earn) then you may want to get your financial house in order before you start investing. Take a good, honest look at your spending and look for any opportunities you can find to trim your expenses. Cancel your Netflix subscription or cut down to a less expensive cable package. Shop around for auto insurance and see if you can find a less expensive carrier.
Trim a few dollars here and there and the savings can really add up. Of course your expenses are only one side of the story. You should also look for ways to increase your income such as working overtime, getting a second job, or selling odds and ends on eBay or Craigslist.
Do I Have an Adequate Emergency Fund?
Assuming you aren’t currently spending more than you earn and you’re able to save some money, you should make sure you have an emergency fund set aside somewhere safe before investing in stocks or mutual funds?
Why? Because stuff happens and you need to have some liquid cash set aside to cover unexpected expenses. If all of your money is in mutual funds or individual stocks, it isn’t as liquid. It will take longer to access it, and there could be tax consequences to selling. But if your washing machine dies or your car needs a new transmission, you’ll be grateful that you have some cash sitting in the bank where you can quickly access it.
Do I Have Credit Card Debt?
If you’re carrying balances on your credit cards, then you might want to think twice before investing. The truth is you will probably earn a better return on your money by paying down your balances than by investing in the stock market. That may sound a bit far-fetched at first but bear with me.
Let’s say you’re currently paying an interest rate of 19% on your credit card. If you pay that card off, you’ll no longer be paying that interest. In other words your return is 19%! In order to beat that your investments would have to earn over 19%. Assuming your name isn’t Warren Buffett, you’d be hard pressed to achieve that kind of return.
Investing is a smart way to improve your finances, but you don’t want to do so prematurely. Your answers to the questions above will help you determine if you’re ready to take the step from saving to investing.