Am I ready to invest?
This 3-question checklist will help you determine when you’re ready to invest your money
Based on advice from certified financial planners regarding the question: Should we put our cash in a high-yield savings account versus the stock market?
Having the safety net of savings makes financial sense no matter your current situation. It’s important to have an emergency fund if you ever lose your job, and you’ll likely need cash to make a down payment on your first home or to achieve other milestones.
But at some point, once you have stockpiled enough cash, you should start reallocating some savings to investing if you really want to maximize the amount of money you can earn, whether it’s for building your wealth or planning for long-term goals like retirement.
Since each person and/or family faces different decisions based on their personal goals and needs, CNBC Select spoke with some certified financial planners (CFPs) about general guidelines consumers can follow to know whether they’re ready to start investing.
The main rule of thumb is making sure you have access to cash when you need it, and that means meeting certain thresholds before taking on the risk of the stock market. One financial planner suggests you go through a “mental checklist” before investing to make sure your finances are stable.
You should be able to answer the following questions with a “solid yes” before you start investing.
Question 1: Do I have an adequate emergency fund?
When you invest, your money can increase or decrease depending on the day-to-day changes in the market, so there is much more risk.
So, before investing, look at the cash you have to fall back on if needed.
Short term money saving strategies
Question 2: Am I committed to leaving the money in place for 2 to 5 years or longer?
For longer-term goals that you’re not looking to achieve in the next two years, there are other factors to consider when deciding where to allocate your money. Savings accounts, even the best high-yield ones, offer a relatively low return compared to investment accounts — sometimes even lower than the rate of inflation.
Investing the cash in a diversified portfolio will usually yield a higher average return than leaving it in a savings account. However, you should be prepared for some fluctuations in your balance and have an investment horizon greater than a couple of years. Placing the cash in a well-diversified, low-cost investment portfolio could provide a greater likelihood of reaching the investment goal.
A more aggressive approach to saving comes with higher risk, but it’s better for long-term goals when you already have the safety net of an emergency fund in place.
The answer to when to put money in a high yielding savings account versus an ETF or any other investment for that matter is [asking] what kind of risk can you afford to take with the money you are putting in?
A common option for beginning investors is putting money into an Exchange-Traded Fund (commonly referred to as an ETF). ETFs are a collection of securities that typically track an index, the most common of which is the S&P 500.
ETFs don’t require large amounts of capital in order to invest in a range of stocks. They can be a good way to dip your toe into the investing pool and to get exposure to the overall stock market. When you open an ETF, you can decide how aggressive or conservative you’d like to be based on when you’ll need the money. It is recommendsed that you use a very low or no transaction cost ETF, such as those offered by Betterment, Wealthfront, Vanguard, Fidelity, Charles Schwab and TD Ameritrade.
Question 3: Can I weather the ups and downs of the market?
This question addresses risk.
If you think you will need the money in the near-term (less than two to three years), avoid investing it because of the additional risk you take on by putting your money in the market. Instead, put this cash into a savings account that offers more security.
For your longer-term goals that allow you to take on more risk, put that money in the market. Experts generally suggest that you can be most aggressive with goals that are well into the future (beyond 10 years), then dialing back the risk for near-term goals.
If you have a longer horizon, then you may be able to handle the volatility. What you want to avoid is having your money subject to risk when you actually need the money.
If you answered “no” to any of the above, then focus on saving
If you went through the above three questions and answered “no” to any of them, you might not be ready to start investing your cash. Instead, focus on saving. Saving is ultimately the first step to investing because, without it, you’re not ready to take on the risk of putting your money in the market.
TODO
- Questions about investing: How to invest money that you can pull out in short term?
- https://www.quora.com/Should-I-put-all-of-my-savings-51k-into-an-S-P-500-And-by-doing-so-could-I-take-out-money-whenever-I-need-to
- https://www.cnbc.com/select/biggest-investing-mistakes/
- https://www.cnbc.com/select/common-regrets-when-saving-for-retirement/