A friend of mine and I go on and off on when exactly is the right time invest. Do I buy stocks? ETF’s? index funds? We seem to just talk about it, but never exactly make that move.
For starters, he works full time- but does not have an employer sponsored retirement account yet. The good part is that he is saving and has no loans. Before getting into into stocks/ETF’s (taxed accounts), I tell him to start with a personal retirement account. It is simple to set up, and your’e getting your feet wet with investing in the safest way possible. We both want to get into investing, we love the financial market – but there are so many variables to consider before jumping in.
So this got me thinking, what comes first? When do I start investing? When is the right time? Is there a specific financial order that I must consider first?
The right time to invest is now, but there are many variables that must be taken into consideration before making that kind of step. These variables are (in the order below):
1. Create a Budget: This is imperative. This helps you keep track of all your expenses along with creating goals on what you want to purchase or save for. There are many ways to track your budget (for example, an excel sheet). On my end, I use the application YNAB (You Need A Budget). It is $7.00 a month, but it is worth every penny on my end. You are probably thinking how ironic it is that I am paying for a “budget” application- but it has saved me more than I have actually spent. This helps give every dollar I have a job. Budgeting includes rent, mortgage, food, groceries, essential items (example: power/water), expenses (example: wifi/phone bills).
2. Build an Emergency Fund: This should be at least six months worth of expenses in a high yield savings account with an online bank. If six months is too big, start small; one month of expenses (slowly build that up).
3. Employer Sponsored Retirement Account: Always go for these. Contribute up to the employer match and earn free money and you are saving for retirement. Feel free to go over the employer match (which is maxing at 18,500 a year) once you have paid off loans, contributed the max to your personal retirement account (which I will get to later), and contributed the max to your employer HSA (health savings) account. I am working very hard on my end to max my employer sponsored retirement account, (also known as 401k) but I still have some budgeting to do as it cuts a massive chunk on my take home pay.
4. Pay off low or high interest debts: Anything above a 4% interest rate you want to pay off as soon as possible (make the minimum payments if it is too much). A while ago, I had a car loan at 2% interest rate. This is honestly not a lot, but I managed to pay off a car in nine months compared to the regular three years that was planned. I did this by budgeting, saving, and putting more money into my payment than normal. It is actually recommended to not pay off a car so fast, but on my end- I plan on keeping my car for a very long time. Also, the extra $10 interest my loan had bothered me- thats a Netflix subscription!
5. Savings for education and more retirement accounts: This is where you can make a separate savings account for this kind of investment. On my end I have this for vacations, but maybe you are saving up for a car- if this is the case, put any extra money towards this. Maybe you are saving for school (that’s a personal investment). Make it a goal. If there aren’t any more savings you need to do (such as a car or education), then I recommend opening up a personal retirement account. This is a lot easier to max your contribution ($5500). You can either do a ROTH IRA or a regular IRA. You can open an account with a bank or other brokerage place for this. You don’t have to start with $5500 by the way, you can go for the minimum (which depends on each institution). I recommend maxing your personal retirement account first, then the employer sponsored retirement account if you can manage.
6. Saving goals: Once you have these settled, it is up to you whether or not you want to pay off (put more money into) a car savings you like, mortgage, loans, or good mix of stocks/bonds/ETF’s.
At the end of the day, this is just my personal strategy. Everyone has different financial situations. I know people who have loans/mortgages and are investing in the stock market (which is going well for them). My goal is to max my personal retirement account first. Then I will up my employer sponsored retirement account to the full 18,500 this year. Once I manage to budget that successfully (while not living like a hermit crab), I will put money on stocks/ETFs that I have been eyeing for five months.
Also, did you notice how I had “investing” last in my list? The reason why I had this set up this way is because:
- If you are putting money into your employer sponsored retirement account, you are already investing (untaxed if the contributions are post tax).
- If you are putting money into your own personal retirement account (ROTH IRA in my case), you are also investing (untaxed growth).
I want my money to work for me in tax advantaged investment accounts first before I jump into taxed investments.