Monthly investing is a great habit. But don’t get distracted by stock market FOMO if your financial priorities aren’t in order. Let’s make sure you’re ready to start investing.

Many people have asked me about investing when they really need to clean up their consumer debt first. Average investment returns won’t outrun the interest rate on a credit card. If poor spending habits put you in a hole, making a long-term investment is like signing up for a 10k before mastering the mile. You don’t need full marathon-level skills to invest, but you do need to have the basic mile down. In other words, you need to make enough money and have the basic skills to be sure you aren’t running a monthly deficit.

“You might be eager to invest but you’re more likely to lose money investing if you have no savings cushion to rely on in a pinch… This is when investing is more like gambling.”

Check the basics:

  1. Debt. Do you have credit card debt? If so, prioritize paying it down monthly.
  2. Emergency Savings. Next, divert that monthly payment amount to a savings account until you have at least 3-6 months of living expenses saved. Shoot for more if you have an unstable job or unpredictable income. You might be eager to invest but you’re more likely to lose money investing if you have no savings cushion to rely on in a pinch. If your transmission blows up, you could be forced to withdraw investments during a bear market. This is where investors get hurt the most. This is when investing is more like gambling.
  3. Regular Savings. After you have an emergency savings funds, build up additional savings for any major purchases or expenses you already know you have in the next 1-5 years. The bigger the expense, the further ahead you should plan.
  4. Investing. If you’ve checked off the basics, you’re ready to invest. Investing a regular amount monthly will have a big impact long-term.

How much should I invest?

I suggest skipping the rules of thumb and looking at a long-term plan. I like online tools like the Vanguard Retirement Income Calculator if you aren’t ready to hire a financial planner. Put in your monthly savings amount and the calculator will tell you what you can spend monthly in retirement. If you don’t like the output, play with the numbers until you do. Then you’ll know what to aim for.

If your financial goals or worries become more detailed, invest in a financial plan. Financial planners can help you determine how much is enough to invest while also incorporating specific  goals like a career change, fertility treatments, or a relocation. Real life is vastly different from investor to investor so it’s difficult to trust a rule of thumb based on income. For example, if two people earn $150,000 and save 20% per year, that might be more than enough for someone who starts early, plans to work until 70, and lives in a low cost area in the Midwest. It likely won’t work for someone who wants to retire at 50 in a major city and anticipates needing to support their parents with a high risk of health issues.

Lastly, a financial planner can help you make the most of the next level of financial management that you’ve reached. We can do more thorough tax planning and insurance analysis. We can look at how your financial plan fits with your estate plan. When these topics become more important to you, it’s time to graduate to real financial planning.