Optimizing your wealth often involves discussing not just how much money to set aside initially, but also the best time to start investing. Understanding the basics of investing can help you decide whether to start right away or wait. Crafting the right strategy depends on your own situation and goals.
Let’s explore how to determine if you’re ready to invest, the benefits of starting early, and how to get off to a good start!
DEBT VERSUS INVESTMENT
When thinking about investing, it’s important to look at your overall financial plan. Jumping into significant investments without handling existing debts might not be the best move. It could be wiser to first pay off debts, which then allows you to redirect more money towards investments.
Many new investors wonder if they should clear their debts first. Doing so can have significant benefits, such as improving your credit score by lowering your debt-to-income ratio. However, there’s a catch: if your debt is mostly student loans with low interest rates and flexible payment plans, it might make sense to start investing sooner.
Remember, everyone’s situation is different. If your student loans have high interest rates, focusing on paying them off makes more sense. You need to be decisive with your financial strategy because wavering won’t improve your situation. In some cases, paying off debt first can yield better returns, especially when dealing with high interest rates. Reducing your debt decreases the interest you pay, offering a guaranteed return.
To help you decide whether to pay off debt or start investing, you can use tools like the debt payoff calculator on Bankrate.
PRE-INVESTMENT PREPARATIONS
Before diving into investments, make sure you have an adequate emergency fund to cover unforeseen expenses without compromising your investments. Without this cushion, you risk having to pull out your investment prematurely and possibly face penalties.
Having sufficient emergency savings gives you peace of mind and allows your investments to grow. Before you start investing, also think about your retirement savings and education funds for your children. It’s a good idea to maximize contributions to these areas before exploring other investment opportunities.
Once you have a solid emergency fund, reduced your debt, and are on track with retirement and education savings, it’s a good time to start investing and taking advantage of compound interest.
WHAT IS COMPOUND INTEREST?
Compound interest means that the interest your investment earns also starts to earn interest, accelerating your wealth growth. Starting to invest early can lead to significant benefits down the road.
The sooner you start investing, the more you can benefit from the power of compound interest.
STARTING YOUR INVESTMENT JOURNEY
When you’re ready to invest, you have options like Mutual Funds, Bonds, Stocks, and Exchange-Traded Funds (ETFs). An initial investment of at least $1,000 is often recommended.
BE AWARE OF INVESTMENT FEES
Understand how fees work so you know what to expect. Buying investment instruments involves commission and trading fees. Make sure you understand the difference between these fees and the returns on your investments.
Investment tools like Mutual Funds and Bonds come with fees, but they can be good choices for beginner investors because of dollar-cost averaging. With ETFs, be mindful of management expense ratios (MER) attached to the funds you’re interested in.
For example, Vanguard offers low expense ratios without charging account service fees if you choose electronic statements. But note that Vanguard requires a minimum investment of $3,000 to open a new account.
Investing can seem overwhelming, but a clear plan makes it manageable. After getting a handle on your debt, building up your savings, and establishing a strong foundation for retirement and education funds, investing becomes easier. Don’t delay—starting sooner can lead to a healthier portfolio and a brighter financial future!