4 Signs You're Ready to Start Investing

Investing is a smart financial strategy. If done right it can build wealth and security for the future.

But timing is everything.

Do you have a financial plan? Are you building an emergency fund? How much debt do you have to pay off?

Before you start investing, it’s important to be in the right place financially. Here are four signs you might be ready — with expert tips on how to get started.

When to start investing

No. 1: You have a financial plan

Before investing, it’s important to know where you stand financially. Debt? Loans? Financial goals? Take stock of your current and expected future financial situation, including income, expenses, and savings.

“Signs signaling an individual's readiness to start investing come at different times. There is no green light for investing,” said Jim Kirk, a CLU, ChFC, and financial advisor at Rocky Mountain Financial Solutions.

For instance, newlyweds saving for a mortgage have different priorities than a family with three college-ready kids. Your unique financial situation will have a large impact on the when, how, and why of investing. That’s why it’s crucial to create a financial plan first.

“[A] financial plan can assist individuals to knock out debt, all while capturing market returns,” Kirk said. “Working off a budget and prioritizing allocation to debt, savings, and investing can be a great start and help the individual begin their investment plan.”

No. 2: You have an emergency fund

An emergency fund is a must, as it protects financial health. Experts recommend saving three to six months of expenses to cover unforeseen events, such as a health issue or a job loss.

“If you have reached your emergency savings fund goal, and then you have passed the goal, you are definitely ready to invest with those excess funds,” said Logan Allec, a CPA and owner of the personal finance blog Money Done Right.

Invest your extra funds wisely. It’s important to diversify your investments by maximizing returns in different areas and simultaneously reducing risk.

“You want to diversify your savings beyond just an emergency savings fund, so you can make money off your excess money, and starting to invest is the best way to do this,” Allec said.

No. 3: You had an increase to income

An increase in income is a smart time to start investing. Plus, you won’t miss the money you haven’t started spending yet. A new job. A salary raise. An annual bonus or tax refund. These are all great opportunities to fund an investment with extra cash.

“If you have a significant increase in income, you should automatically start investing 5-15% of the income in investments,” Allec said. “This is because the increase in your income would best benefit you by investing the money, so you are making additional money off of your increase in income.”

Further, an income increase is a good time to revisit a budget. Sit down and update your income and expense amounts. Bump up contributions to financial goals, like an emergency fund, 401(k), and other investments.

“[I]t is much better to invest your new-found extra cash than to just blow it on random things and spend more than what you already have budgeted,” Allec said.

No. 4: You’ve researched investing

Investing isn’t intuitive, but it can be learned. If an investor doesn’t understand how a financial service or product works then it’s best to walk away or learn more before making a decision. Risky investments due to a lack of knowledge are bad news — and oftentimes avoidable.

“One of the most important signs to know that you are ready to start investing, is that you have worked on educating yourself about investing,” Allec said. “You do not want to just play around and guess with your investments, as this can be risky, so you must be educated on how to do this the correct way.”

To learn more about investing, invest in your knowledge. Consider joining a professional development course or reading subject-specific books. Here are two resources to get started:

Investing for Your Future

Sponsored by Rutgers Cooperative Extension, this is an at-home online course covering financial investments. The 11-unit course was designed for beginning investors with small dollar amounts. It covers three levels of materials. First, the course covers the basics to set the groundwork of how and why you are investing. Next, the course explores specific types of investments and how to purchase them. Finally, the course provides additional resources, such as how to find a financial advisor and how to avoid fraud.

The Intelligent Investor

The Intelligent Investor, written by Benjamin Graham, is considered by many to be the most important and influential book on investing. In fact, Graham is known as the father of value investing — a specific investment strategy. Graham’s objective was to provide a book for the everyday investor. Difficult concepts and terms are broken down into actionable steps for budding investors. The book focuses on risk management, maximizing probabilities, and a disciplined approach to investing.

How to start investing

Investing isn’t just for the rich, at least according to Erin Lowry, author of “Broke Millennial Takes On Investing: A Beginner’s Guide to Leveling Up Your Money.” Lowry’s book is an investing how-to for building wealth. Here are actionable takeaways for the investing newbie.

No. 1: Start by saving

Cash, stocks, and real estate aren't the only type of investments. Emergency funds and retirement accounts count too.

Think of short- and medium-term investments as viable, legitimate forms of investing. Chances are you’ve already tested out the investment waters in some capacity.

An emergency fund is the perfect first step in investing. It creates a nest egg — stored away and earning interest. Ditto for savings accounts, despite the low interest rates.

A company-sponsored retirement account is another option. As a bonus, many employers offer a retirement match program. Take advantage of these long-term investment programs, if you haven’t already. They pull directly from your paycheck either pre- or post-tax to fund a 401(k) or IRA. Further, a retirement service often automatically customizes portfolios via asset allocation, diversification, and rebalancing.

No. 2: Be wary of high-risk investments

Lowry makes a clear delineation between someone who is rich versus someone who is wealthy. She likens high-risk investing to get-rich-quick schemes. Real wealth is built slowly, often generationally.

According to Lowry, high-risk investments — like picking individual stocks — shouldn’t be a primary investment. Why? Individual stock picking doesn’t guarantee a return. But if you’re going to do it, be smart about it. Diversification, risk tolerance, asset allocation, and goal-setting are key factors to keep in mind.

A good option is to consider an online investing service offering fractional shares. This can be a cheaper and less risky investment. Although buying fractions of shares isn’t common, some companies will buy whole shares and then divide them for clients.

Before picking an individual stock, answer the following questions:

• Is it profitable?
• Is it reputable?
• What’s the history of returns?

Then, go from there.

No. 3: Determine if a robo-advisor is right for you

Different types of financial advisors have their own pros and cons. For first-time investors, a robo-advisor might be the best choice. However, it’s important to note that alternatives do exist for newbie investors without a large initial investment.

Robo-advisors are an increasingly popular automated investment service. They’re often designed to help everyday investors access the market.

The term ‘robo-advisor’ is misleading, according to Lowry. Most online services are branded as robo-advising, because they automate financial processes. But they do have a human advisor tweaking calculations and providing customer support — all behind the scenes.

It’s important to choose a robo-advising firm that maintains appropriate securities registrations. For instance, opt for a firm with a Securities and Exchange Commission (SEC) or a Financial Industry Regulatory Authority (FINRA) registration. SEC regulates investment advisers. FINRA regulates brokerage firms and stockbrokers. These registrations help ensure an investor avoids scam advisors.

Here are the advantages and disadvantages to robo-advisors.

Pros

• Low-cost
• No or low minimum balance requirements
• Accessible market
• Optimized strategies
• Automated rebalancing

Cons

• Fees
• Lack of flexibility
• Limitations to customization
• Little to no face-to-face interactions

No. 4: Don’t wait until you’re debt-free

Investing doesn’t need to be the last step in a personal finance journey — after paying off debts. This is a dangerous misconception. One that can lead to several years of missed wealth building.

Some debts, like credit card debt, should be paid off as quickly as possible due to high interest rates. Others, like student loans or mortgages, shouldn’t stop you from investing. But this topic is fiercely debated in the financial industry.

Determine the right answer for yourself. Find out where you stand after number crunching. The amount of money earned thanks to compound interest might outweigh the amount of money owed in interest. For instance, if you have a low interest rate (3-5%) and expect your portfolio to earn at least 6-8% percent in returns, then consider investing. Have debt over 7%? Pay it off asap.

“It’s the only way to make a compelling case for why it’s in your best interest to start investing before paying off student loans,” Lowry writes.

Tips for first-time investors

No. 1: Start small with an exchange traded fund (ETF)

Catherine Valega, CFP(r), CAIA

Start with a diversified stock ETF. And set up an automatic investment plan — investing a certain sum every month. I would never have first-time investors start stock investing on their own.

No. 2: Focus on a retirement plan

Ian Wright, CEO of Bequests

If your employer offers a retirement plan, make sure that you sign up for it. It’s an easy way to get started with investing, not to mention that it has tax benefits, too. A portion of your salary will automatically go into your retirement savings, and your employer could also have matching contributions.

No. 3: Patience is key

David J. Waldron, author of “Build Wealth With Common Stocks: Market-Beating Strategies for the Individual Investor”

Patience is the scarcest, and, thereby, the most valuable commodity available to the retail-level investor.

No. 4: Avoid emotional investing

Sam Hawrylack, entrepreneur and blogger

One of the best tips I received when I was getting into investing was to never make emotional investment decisions. Make a plan based on your financial goals and stick to it no matter the inevitable ups and downs of the market.

Bottom line

Investing is a key component of wealth building. But it depends on timing. Make sure your finances are in order first.

DISCLOSURE: TheLending does not provide investment advice. Please consult a financial professional for investment advice specific to your situation.

Logan Allec is a CPA, personal finance expert, and owner of the website Money Done Right. After spending his 20s grinding it out in the corporate world and paying off more than $35,000 in student loans, he dropped everything and launched Money Done Right in 2017. His mission is to help everybody — from college students to retirees — make, save, and invest more money. He currently resides in the Los Angeles area with his wife Caroline and son Hunter.

Sam Hawrylack is a full-time entrepreneur and blogger. Hawrylack uses her BS in Finance and MBA to help others get control of their finances through budgeting, saving, investing, side hustles, and travel hacking. After following the FIRE movement’s principles, she was able to quit her high-stress job in the financial services industry in July 2019 to pursue her side hustles. When not working, she enjoys spending time with her dog and traveling with her husband.

Jim Kirk’s passion for finance began as an undergraduate pursuing a degree in finance, which included managing the university's endowment fund. Kirk started his career as a financial advisor in 2007, which gave him a broad perspective about investing and wealth management. His experience was broadened by serving as a Wall Street analyst, investment banking analyst, manager of financial planning and analysis, and chief financial officer. To better serve clients, he obtained the CLU and ChFC designations, and currently operates under the Fiduciary standard at Rocky Mountain Financial Solutions.

Catherine Valega CFP(r), focuses on meeting the wealth management needs of small businesses, women, impact givers/investors, as well as non-profit organizations and charitable donors. She builds long-term relationships by understanding client goals, dreams and concerns and creating customized financial plans tailored to their specific needs. Valega received her B.A. in Economics from the University of Pennsylvania, and a M.A. in International Relations from the Johns Hopkins School of Advanced International Studies (SAIS). She is a member of the Financial Planning Association, Boston Women in Finance, and CAIA.org.

David J. Waldron is an individual investor and self-improvement author who inspires the reader to achieve the personal and professional goals that matter most in their life. Waldron received a Bachelor of Science in business studies as a Garden State Scholar at Stockton University and completed The Practice of Management Program at Brown University. He is currently promoting his fourth book, Build Wealth With Common Stocks: Market-Beating Strategies for the Individual Investor, released in hardcover on January 19, 2021.

Ian Wright is the CEO & founder of Bequests, which provides information about retirement and end-of-life products in the UK. He's a serial entrepreneur and the author of Brilliant Maps: An Atlas for Curious Minds.