Investing can be pretty scary right now with all the talk about a looming recession. Beginners especially may wonder if now is a safe time to invest, and the truth is that it depends. Investing is a great way to increase your wealth, but you need to check the following three boxes before you begin.
1. You have an emergency fund
Emergency funds are crucial to investment success because they allow you to leave your investments alone until you are ready to sell them. When you don’t have emergency savings, you may have no choice but to sell your investments, possibly at a loss, when unexpected costs arise to avoid going into debt.
You should keep at least three months of living expenses in a high-yield savings account for your emergency fund. Some people are more comfortable saving six or 12 months of living expenses. That depends on you. You may need to adjust how much you keep in your emergency fund as your budget changes over time, and if you spend any of it, you’ll need to set aside some cash to replenish it and be ready for the next emergency.
2. You have money that you don’t plan to spend in the next five to seven years.
It is also not advisable to spend the money you plan to spend in the next few years because the stock market can be quite volatile in the short term. While there’s a good chance you could build your wealth over several decades, this is less certain if you’re only investing for short periods of time.
Keep the money you’re saving for short-term purchases, like a car or a house, in a savings account. This way, you won’t have to worry about losing money and you’ll have access to your funds when you need them. Some online savings accounts even allow you to put your money into different digital envelopes, so you can separate your funds for each of your personal goals.
3. You have a strategy to help you avoid emotional decisions.
Watching the value of your portfolio drop is not an easy thing to do, which is why many experienced investors try not to pay too much attention to the daily movements of their investments. This helps them avoid the temptation to buy or sell based on recent performance. If you’re investing for the long term, these short-term fluctuations don’t matter much anyway.
Once you’ve invested your money and are sure you’re diversified enough, avoid checking your portfolio more than once every few months. See if you can set up automatic contributions so you don’t have to look at your balance every time you want to add more money to your account. Many taxable brokerage accounts and even some retirement accounts allow you to enter your bank routing and account numbers and set up automatic transfers on a schedule.
Are you ready to start?
Growing your wealth through investing is rarely a linear process, but it can pay off big in the long run. So once you’ve checked these boxes, don’t be afraid to dive in.
If you’re new to investing, an index fund is a great place to start. This is a package of shares that mimics the performance of your target market index. They are quite affordable and offer instant diversification. Many also have historically strong returns.
To get started, you can first choose the index you are interested in. The S&P 500 is a smart choice for many beginners. It contains 500 of the largest companies in the United States, including the best performers in various market sectors. Then, you have to look for a fund based on that index. It will often have the name of the index in the name of the fund.
You may want to compare a few index funds before choosing one. Look at their historical performance and expense ratios. These are annual fees written as a percentage of your assets. For example, an expense ratio of 0.03% means that you will owe the fund manager 0.03% of your assets invested in the fund each year.
Once you’ve chosen a fund, all you have to do is invest your money or set up an automatic contribution schedule and wait. It will take some time and there is a chance that you will lose money in the short term, but stay the course and focus on long-term growth potential.