4 Things You Need to do Before You Start Investing in Your 20s
Do you know if you're financially ready to start investing? Here I list 4 things you should have done before you start investing - whether your in your 20s or not.
If you’re in your 20s, you’re probably crazy busy either in college or working hard to start building your life. Investing requires cash, and that can be hard to find at this point in our lives.
But have you ever wondered if you should start investing if you’re in your 20s? There are 4 things you need to do before you start investing (and you don’t even have to be in your 20s for these to apply).
1) Build a 3-6 Month Emergency Fund
Before you start investing, you need to make sure you have all of your bases covered. Life can throw curveballs at any time, like what happened to our car a couple of weeks ago. That was a nice, unexpected $400 bill we had.
You never know when emergencies will pop up so make sure you have a 3 to 6 month emergency fund. It should be kept in a bank account you can readily access when you’ll need it.
This emergency fund you save should cover all household expenses for at least a few months. That being said, you should include housing, groceries, insurance, cars, utilities, and any other expenses you normally have.
Why is it so important to have an emergency fund? Why can’t you just start investing without one?
If you don’t have an emergency fund and start investing, what happens when an emergency comes up? If you have all your money tied up in investments, it can take several days to a week to get that money liquid.
In addition, the last thing you want to do is cash out your investments. It may be during a bear market and you can lose money. In addition, there are commission fees or penalties depending on the investment account you use.
Having an emergency fund will build you a stable financial base for your investing future. Make sure you do it right the first time by building up enough money to last you 3 to 6 months.
2) Pay Off All Consumer Debt
Once you have your emergency fund taken care of, the next step is to pay off all consumer debt (or bad debt).
Have any balances on your credit cards? Pay them off as soon as humanly possible.
Credit cards are absolutely the worst kind of debt. They prey on the consumer and make the poor even poorer.
They can be a fantastic tool if you’re responsible with them. That’s a big IF. If you are responsible with credit cards and want to get the most you can out of them, then consider travel hacking it up. It’s great.
Other debts you might have may include a car loan or student loans. Should you pay these off before you start investing seriously?
Yes. Pay off the car. Pay off the student loans. Get that off your chest and just be rid of them. You don’t need that baggage! Just think how much lighter your step will be if you didn’t carry around any loans anymore. Pay them off and kick them to the side of the curb where they belong.
Have a mortgage? If you do then congrats! That’s not bad debt so don’t worry about paying that off before you start investing.
If you’ve paid off all your bad debt then you’re ready for the next step.
3) Have a Plan
If you have a solid emergency fund and have paid off all your bad debts, then you’re almost ready to start investing!
It’s time to make a plan – the “P” word. If you go into investing willy nilly then you’re doing it wrong.
Get with your family or financial advisor and make a plan. What are your long-term goals? Where do you want to be in 20 or 30 years? Can you handle risk or are you risk-adverse?
We won’t get into all the different types of investments out there. The sure-fire way to a comfortable retirement is using a Roth IRA.
Decide what investments you want and throw them in a Roth IRA so they can grow tax-free. You will save hundreds of thousands if you choose to use a Roth over a traditional IRA because you will be investing money you’ve already paid taxes on (versus paying taxes when you withdraw the money in retirement).
Have a plan, and stick to it. At this point, you’re ready for the final step on the road to investing.
4) Start Now!
The best time to start investing was 10 years ago. The next best time to invest is today!
If you are in your 20s, you still have a solid 40 years to go before normal retirement age! You have all the time in the world on your side to grow your money.
Too many young people think they’ll take care of their retirement savings when they're older. They keep pushing it off and off until it’s too late. Don’t do that!
Even if you have to scrimp and live on a tight budget, start investing now no matter the amount.
If you invested $1,000 today, do you know how much that would be worth in 40 years?
Assuming only an 8% yearly return (which is rather modest), you would have $21,725 in 40 years.
If we assume a slightly better return at 10% every year, then this amount would be $45,259! And that’s if you only invest $1,000. How neat is that?
If you want to check out more scenarios, then use this retirement calculator. I love it.
That’s the power of compound interest, especially if you start when you’re young. Don’t waste time when you could put it to work right now. You’ll thank yourself later.
So there you have it – the 4 things you need to do before you start investing. It isn’t rocket science. Just persistence.
Like Nike says, just do it. And then you need to stick with it and have the discipline to continue the investing plan over the years.
If you do this starting in your 20s, then you’ll be able to retire well before the ripe, young age of 60.
If you haven’t started investing already, what is stopping you? If you have started investing, what is the biggest lesson you’ve learned so far? Share below!